Payday loans are popular in the United States. By some estimates, there are more payday loan outlets than McDonald’s (and there are more than 14,000 locations of McDonald’s.). First, let’s define a payday loan. It is a relatively small loan usually intended to get the borrower to their next paycheck. These loans are usually unsecured, and often do not actually require that they be paid from the next paycheck. The fees and interest rates are normally exorbitant, and the loans are made by storefront
loan sharks lenders rather than banks. They frequently advertise how easy it is to get easy money wired to you in a day, and even have “celebrities” like Montel Williams promoting them. Lenders will normally renew or roll over the loan with the payment of the interest and fees, much like a pawn shop. While these are common traits of a payday loan, there is no absolute definition and many states may have slightly different definitions. The FTC has some information on its website. When considering getting a payday loan, keep in mind this rule: do not get a payday loan!
Annual interest rates on payday loans are commonly 400-500% (annualized) and could be 2000% annualized (yes, that is “thousand”). Studies show that as many as 80% of borrowers roll over or renew the loans when due with the payment of fees and interest, and those charges could be more than the original loan amount in as little as 6 weeks. This is where most of the income for the lender is generated and this is what they want – the chart to the right, describing the never-ending cycle, is from an actual training manual. Does this sound like a good deal? Some states, including Georgia, have made payday loans unlawful (although you can still find the ads on google that will lead you to lenders with equally bad personal loans). Many unscrupulous lenders will still target borrowers in Georgia via television or the internet because they know that many will pay the fees without knowing the loans are unlawful. Other lenders are teaming up with Native American tribes and setting up operations on reservations to take advantage of Tribal Sovereign Immunity.
Finally, here is a humorous, but informative, video from John Oliver about payday loans (apologies for some of the language in the video). What is just as bad as payday loans? Yes, you guessed it – vehicle title loans.