by Tricia
John Leland from the New York Times is again discussing debt (he’s the one who interviewed me back in February). This time, he’s discussing payday loans and a new thing out there called non-profit payday loans.
Payday loans are notorious for charging huge amounts of interest in the neighborhood of 500%+. Way back when, I almost worked at a payday loan place and while I didn’t know too much back then about finance, I knew that the rates they charged were very high. Needless to say, I got a call back but I told them I wasn’t interested. Now that I know more about finance, I’m glad I did that.
Non-profit payday loans (sometimes called alternate payday loans) sound a little better. They are non-profit, right? But are they really that much better than payday loans?
“…alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they call for the principal to be repaid in two weeks. At GoodMoney, for example, borrowers pay $9.90 for every $100 they borrow, which translates to an annual rate of 252 percent.”
[Via New York Times.com]
252%!!!
I’ll give the non-profit payday loans one thing…compared to payday loans they are technically better since they have a lower interest rate and it appears that some organizations will work with you to try to help you with your debt. But that isn’t enough to help people avoid the debt traps that payday loans (of any type) create. To me, they will remain a prime example of predatory lending for they target those who have a need for money and little knowledge about interest rates.
I’ve read stories online from those who have been trapped by payday loans. I’ve even tried to get an interview once from someone that I’ve talked to, but it didn’t work out. If anyone reading would like to share their story about payday loans, I’d love to hear it and share it on here.
I don’t know who would ever even consider a predatory Pay Day Loan…it’s a loan shark loan in my opinion and they’ll want it back in spades.
Shady! I can’t believe certain nameless tax preparation firms engaged in similar tax refund loans as well…Stay away!
-Raymond (MONEY BLUE BOOK>
So, the Goodwill offers payday loans at a break even point (or even at a loss) by charging $9.90 per $100. Payday lenders typically charge $15 per $100. These are two week loans, not annual loans, so applying an annual rate doesn’t make sense.
I find it facinating that a non profit is offering a product for no profit and you still cricizing it for being too expensive.
Either way, anyone who has ever paid a bill late or bounced a check understand that the fees for payday loans are cheaper than that.
I don’t understand. If the business is “non-profit,” why do they charge interest?
Non-profit is a designation from the IRS and means that the organization is exempt from taxes, has a charitable mission, and is run by a board of directors (among other things). They will still try to pay for their programs by charging fees for sevices, loans, etc. and most well run organizations will turn a profit or at least break even. The difference is that this profit will pay for more programs, not make the executive director or the board members (there are no shareholders) rich.
That said, I am always shocked at how high both these rates and the microenterprise loans in developing countries rates are. Maybe I just need to see the math to get the reasoning?
So “non-profit” is basically a label that doesn’t really limit an organization from profiting.
We use a slightly different terminology here in Sweden, that’s why I thought it sounded strange.
Way back in the day I used a payday loan…the experience was enough to make me swear off those things forever! They charge interest rates that would make even a loan shark cringe, and they are set up so you can never really get out of them without some hit to your finances. It took me 3 paydays to get out of that loan, because at the time I was not on a budget at all, and the bills kept coming in regardless of what I owed these people. In the end, I let a utility slide for a month just to get rid of this debt that kept growing at almost exponential rate. Not the best way to handle it, but the experience convinced me that contrary to your first commentor says, payday loans ARE evil!
It is my understanding that “some” Goodwill’s are now privately “owned”. That is they are not controlled by the charity – Goodwill.
loansharks??? No, those are the guys that make loans and hurt you when you dont payback. If its a legitimate business, that is licensed and follows the laws that regulate it….who cares. Its America. Don’t want a loan, then don’t go.
There is a great deal of misunderstanding and incorrect information regarding payday loans and the people who use the product, most of it coming from people who have never used or needed a payday loan. First, since a payday loan is typically for 2 weeks, and most people don’t understand how the APR is calculated, using the APR (annual percentage rate) is very misleading.
Simply put, the APR for a payday loan is presently calculated by taking the fee divided by the principle and multiplying it by the number of payment periods per year, then multiplying by 100 to get the percentage. For example, for a $200 payday loan with a fee of $30 for 14 days, the APR is calculated as follows:
30 / 200 = .15 x (365 days per year / 14 day payment period) x 100 = 391.07 % APR
Now take into account if other fees or payments were put into APR’s:
A $1.50 ATM fee on $50 instead of going to the bank the next day
1.50 / 50 = .03 x (365 days per year / 1 day payment period) x 100 = 1095% APR
A $35 late fee on a $100 credit card payment for a payment that is 7 day late
35 / 100 = .35 x (365 days per year / 7 day payment period) x 100 = 1825% APR
A $24.00 bank overdraft fee on a $25 check until the direct deposit arrives in 5 days
24 / 25 = .96 x (365 days per year / 5 day payment period) x 100 = 7008% APR
So, taking the given equation, and limiting the loan to an APR of 36% would allow for a company to charge about $1.38 per each $100 loaned. Since a non-profit company has basically said it needs to charge $9.90 per $100 and is still not completely covering costs, then there is no way any business could survive with a 36% APR cap. It is true that some people do not use payday loans responsibly, which can lead to financial trouble, but isn’t it also true with every financial product available today from credit cards to home loans? It wouldn’t be right to eliminate credit cards because some people abuse them just as it would not be right to take away the option of payday loans from the millions of people who use and rely on them.
I did not know they did the non profit ones. Interesting.
My husband should know better than to use payday lenders. He was a CEO about 40 years ago, after all. But he’s bullied me into the payday lender trap not once, but twice now. He doesn’t have a checking account, which is required, so I have to allow him to use mine. He borrows as much as they’ll let him on the basis of my Social Security check, which is the only predictable income I have. (I work from home for a reputable telemarketing company, but that paycheck varies widely.) Only a major financial windfall got us out of the trap the firwst time, but after catching up bills, an expensive automotive repair, my splurge on Christmas and his decision to buy a new purebred dog, plus living expenses that are higher than our income right now, he doesn’t feel we have a choice. If I don’t go along, I get no peace. Only God’s Providence got me out of this trap the first time. I can only pray He’ll have mercy on me the second time around, and help keep us out of the payday lending trap permanently next time.
Like with most things in life, I believe payday loans as a financial tool should be used in moderation, if at all. The rates on these type of loans are ridiculous at best. That being said, emergencies do happen, and only then do I think this might be a good idea. At the end of the day, some of us need to learn how to be more financially responsible. These loans are somewhat addictive to some, know your limit just like with anything else. Good luck and God Bless you all.
One point you missed in your observation. Non-profits, unlike payday lenders are not required to pay state or federal tax on profits. Hence they are able to offer the loans at a lower rate.
Which ever way you see it, one thing is obvious, the cost of short-term credit is expensive. I don’t think APR is relevant when dealing with two week loans. Taxes or no taxes.
I agree with CreditCredible.
Payday loans are not traps. The issue here lies with the consumers. It’s just a matter of being responsible enough to keep their ends of whatever agreement they had when they availed of a payday loan.
A payday loan is a great way to take care of short-term cash crunches, because they’re lent out based upon the amount of money that you make from your employer after taxes. This means that a typical usually won’t put you too far in the hole that it’s intimidating to get out of one and pay it back.
It’s not the fault of the payday lender if the consumer accumulated more loans than he or she could repay. Let us BE RESPONSIBLE. That simple.
What more? Banks also charge huge interest. And what about overdraft fees? I’m petty sure that banks can be sneaky too. I think they just dislike payday loans because they’re more convenient so people opt for them. Some payday loan companies even offer low fee loans so they are cheaper. To read more about this issue, check this out. http://personalmoneystore.com/moneyblog/2008/08/04/banks-caught-lying-about-the-payday-loan-industry-the-real-predatory-lenders-part-i/#comments
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Faxless payday loans are meant to help you meet the financial implications emerging out of urgent cash requirement like for medical purpose and payment of bills. These loans are easily availed without a lot of documentations.
Payday loans often have a very high APR….
Often, when you apply for a loan or a cash advance (whether it’s at a bank, a consumer loan store, or a payday lender), you have to provide a lot of documents like bank statements, phone bills or pay stubs. Even some lenders that claim to be “faxless†require you to fax all those documents for verification.
No Fax Payday Loan is different. We’re truly paperless. So you can get the cash you need without the hassle of paperwork, faxing, or waiting in line. Just fill out our secure online application, and you can have your cash the next day. It’s just one more reason why thousands of people choose No Fax Payday Loans when they need cash to cover life’s unexpected events. http://personalmoneystore.com/moneyblog/
I have been trapped for nearly a year now in payday loans. It started off simple enough, a $200 loan that I paid $60 interest on and $50 principal and paid it in two payments. But I kept finding myself every few paydays doing this again and again. Once my wife was full time back in school for her Master’s degree and could not work but a shift here and there, I found myself getting a second and third and then fourth payday loan. Soon I was getting payday loans to pay the interest on the payday loans so I could still afford to pay my mortgage and car payment and other bills. I then found myself owing more than my semi-monthly paycheck, and getting charged NSF fees by the bank. Now my wife graduated and is back to work and we are slowly getting these paid, but I see another 3-6 months of financial terror and credit ruin before I can achieve financial independence again. I am frustrated, and none of these legal loan sharks will work with me or accept that they already have been paid back more than twice what I borrowed. It amazes me that a $300 loan costs $90 twice a month (I only get paid twice a month, think what it would be if I got paid once a week or every other week!) and they can charge this $90 up to four times before the fifth payment where they still take $90 interest plus another $50 towards principal. I will pay back $1200 on a $300 loan, and I have more than 5 of these loans going!! We need legislation NOW that prevents these loan sharks from ripping off us poor people, and offering multiple loans to the same person(s). Also, they must pass a law that makes them check to see if there is more than one outstanding payday loan and if so, they cannot loan money until these loans are paid off!! I have more than one loan from the same address with a different company name, and did not realize it until I read the fine print on the loan documents. One address is the same on three different loans from different company names. How can 3 different companies have the same mailing address? I am appalled that I got sucked into this and finding it almost like a credit card, unable to get out without declaring bankruptcy. I want the President to make it a law that they cannot charge more than 29% interest, and it must be paid back in 90 days, with an immediate pay down of principal balance.
Thank you for allowing me to vent, and feel free to share my story with others!
VERY INTERESTING DISCUSSION!
A clarification for @Bethany and @College Girl.
From having worked for several non-profit organizations and taken classes in nonprofit management, my understanding is:
“Non-profit” or “not-for-profit” in the US means exactly that. It is an IRS classification that means that any money collected over expenses is returned to the organization’s *mission*, NOT into anyone’s profit.
The thing that gets confusing is that salaries are a part of expenses. Many nonprofits pay very competitive (“high”–also, a relative term) salaries.
HOWEVER, non-profits are mission-based organizations that serve a public benefit. If they divert any money from this public benefit, they are subject (supposedly) to pretty onerous IRS sanctions.
The nonprofits I’ve worked for, and been on the board of, take their mission (and the sanctions) *VERY* seriously.
Hope that helps clarify. Happy to discuss more if it doesn’t (or if I’m mistaken in any of my explanation.:)
It is my understanding that “some” Goodwill’s are now privately “owned”. That is they are not controlled by the charity – Goodwill.
Aw, this was a very nice post. Taking the time and actual effort to make a top notch article…
but what can I say… I put things off a whole lot and don’t manage to get anything done.