Sunday, April 28, 2013

Re-Post: Tazi's Corner: Issue #3 - Thoughts On Payday Advance Lending Services


Dear Readers,

This week, I am re-running one of my previous columns for a few reasons. First, my secretary (aka Mommie) has been walking around like a zombie and grumbling about things like "final exams" and "senior portfolio" and "finding full time work" and other things that concern me not. However, these preoccupations have left me with out her typing services. Due to my lack of opposable thumbs it took me hours just to type this intro, at which point I decided a re-run would be best!

I chose the subject of payday lending services because once again the Rhode Island state government has introduced legislation that lenders claim would run these services out of town. Is this a good thing? A bad thing? Are you indifferent to the idea of payday lending services? Do you have experience with them? Please read my point of view, and share yours below, in the comments section! --T.K.

Tazi's Corner
Life As Your Pet Sees It!

Today I am going to ask you to join in the conversation by leaving your thoughts in the comments section!! First, though, please read what I have to say!

I think we have all heard the commercials and seen the stores for Check ‘n’ Go, Advance America, and other payday cash advance services. I have read the commentaries on such services, which have been both praised and vilified as God Sent or as a Financial Hell Hole. One thing I have never done though is pay much attention to them since I never had a use for such a service. Cats tend to be self-centered (on occasion) you know.

This past week I was reviewing the activity of my state legislature (because a politically astute kitty is a good citizen!) and I noticed a bill regarding the interest rates charged by these payday advance services. Although happy with the nature of the bill, the need for it my left my hackles raised. It turns out that Rhode Island is the only state in New England that allows payday advance services to charge a greater than 36% APR – much greater. In Rhode Island, the maximum allowable annual percentage rate for a payday loan is 260%. No, there is not a missing decimal in that figure; 260% APR is the rate for a payday loan in Rhode Island. I find the exorbitant interest rates allowed by law quite ironic, considering that loansharking is illegal.

For those who are not familiar with how a payday advance works, it is pretty simple: The borrower writes a check for the amount of money borrowed, plus the interest charge, which in Rhode Island is 5% of the total borrowed per week, or $10 on a two-week, $100 loan. The borrower has two weeks or until their next payday to repay the loan plus interest charges, whichever comes second. If the borrower fails to pay on time, the lender will cash their check. If the borrower’s cash is elsewhere committed when the loan comes due, they can pay the lender in full – including the interest charge – and take out a new loan, essentially revolving the debt. However, because the original loan was paid in full after only two weeks the additional interest charges to the borrower are not reflected on the lender’s books, just in the borrower’s wallet. Ergo, the interest is not capitalized, a selling point these lenders like to highlight. This all sounds pretty simple, but even the simplest things can quickly become complicated.

Payday advance services make money on high finance charges. The lender is not going to get rich off of the person who is borrowing $50 to cover the week’s groceries due to an unexpected car repair biting into their budget. This is why the lender does his or her best to up-sell the borrower into taking out a larger loan, explaining how the borrower can revolve the loan by paying only the interest. Most people who use payday lending services do not have good credit, otherwise they would be using a credit card; nor do they have anything of value to secure a loan through pawn. In short, they have little; and have little chance of changing that anytime soon. Their financial outlook is depressing and here is someone offering to help them improve their credit by offering them a loan in excess of what they need! So the cycle of madness begins…

Through vice; bad choices; poor planning; bad luck; or a combination of all of the above, many who use payday cash advance services do not have enough money each week or each month to pay for their basic needs, and have come to depend on payday advances as a way of extending their income. Loans are taken for an amount equal to half or more of their next paycheck – but when their next paycheck comes around, they need most or all of it to pay the rest of their bills and/or their lifestyle choices (I have received many a letter from heavy drinkers/smokers/gamblers who claim they are unable to make ends meet). The only immediate solution is to pay just the interest on the advance, revolve the loan, and hope that things will improve over the next two weeks. Rarely do these hoped for improvements occur, and the cycle continues, with borrowers paying double, triple, or more in interest on a loan that will never truly be paid-in-full, regardless of what the lender’s books say. The fact that the interest rate is horrifically high only helps to perpetrate this cycle.

One way out of this vicious cycle would be to put aside monies – even as little as $20 a week – to put towards the principle on the micro-loan. Give up coffee shop coffee, cable, or your mobile phone for a few months and the money will be there; it will add up rather quickly, allowing the principle of a $100 loan to be paid in only a few weeks as opposed to never. I realize this is something people who get caught up in these schemes do not want to hear – they want to hear words of sympathy of how they were victims of easy credit rip-offs (okay, all together now "Ain't we lucky we got 'em, Good Times!") and how the government should do something about these legal loan sharks (which legislators are attempting to do here in Rhode Island). These legal loan sharks, in turn, argue that they are loaning money to high risk creditors and therefore need to charge 250%+ in interest to stay in business, pointing to their default rate as proof of their losses. Which came first, the chicken or the egg?

I do not disagree that the interest rates charged by these businesses is positively criminal, and that it should be drastically lowered and legally capped to, say, 52% APR which would be approximately 2% every two weeks on a short-term micro-loan – low enough to be manageable but high enough to create a profit. I also believe that there needs to be a certain level of personal responsibility involved on the part of the borrower. In other words, don’t borrow money that you cannot afford to repay; don’t commit yourself to contracts that aren’t in your budget to cover. I am amazed at how many “poor” people are walking around with smart phones, insisting that they “need” one (to the cost of $100 or more a month) in order to get by in life. I have received letters from the unemployed questioning why people do not understand that they “need a smart phone for work”. My little kitten mind is baffled at such logic!


Payday advance loans: A necessary part of our American economy; a necessary evil; or just plain evil? Discuss!

This is just my two-cents on the subject…which right about now is the balance of my savings account because I just spent my allowance on kitty snax. Woe betides the Mommie who thinks she can keep ME on a diet!!

Snuggles,
Tazi



Ask Tazi! is ghostwritten by a human with a Bachelors of Arts in Communications. Tazi-Kat is not really a talking feline.


2 comments:

  1. I say they are a waste of money!! I believe in the whole, save your money, plan a monthly or even a weekly budget. If your budget does not allow for the "extras" I think it is time to cut them out. If you have digital cable or even the "technology" bills, maybe cutting down to a simple pre-paid cell phone (with no internet or smartphone capabilities), getting rid of your movie channels and even if worse comes to worse, getting rid of cable. I know people who have done this and they spend a lot more time with their families (but they do free stuff, like board games or go outside).

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