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The debate over payday loans is often clouded by wrong information. Here are some basic facts about payday loans, backed by research.
The fees for alternatives to payday loans are not an affordable or attractive option for most people. A recent study found that the median implicit interest paid by consumers for bank overdraft protection is more than 4,000%.
Payday loans provide an easier and more affordable way to make ends meet in the short-term. According to a government survey the average APR on a two-week checking account overdraft is 1,067%, more than double the rate on the typical payday loan.
Payday loan customers understand the product and have decided it’s the best choice for them. A January 2009 study from George Washington University found that payday borrowers make informed choices. About half of the 1,173 payday borrowers surveyed considered other credit alternatives -- such as bank, credit card, or personal loans -- before taking out a payday loan. Over 80% lacked sufficient funds in their bank accounts to meet their expenses, so by taking out a payday loan they avoided expensive checking account overdraft fees.
Payday loan borrowers are satisfied customers. A January 2009 study from George Washington University found that nearly 90% of payday loan customers were either very or somewhat satisfied with the transaction.
Unlike overdraft and credit card fees, payday loans are clear and easy to understand. A 2008 government study found that a large percentage of banks take deliberate measures to increase the frequency of customer overdrafts -- such as displaying account balances on ATM screens only after the overdraft has occurred, and increasing the number of insufficient funds checks by clearing large customer checks before small ones. Banks also sign up their customers automatically for overdraft protection without informing them. Compared to these overdraft practices, payday loans are transparent since stores are required to clearly post all fees and the APR.
Banning payday loans makes things worse for consumers financially. A study found that after payday loans were banned in Georgia (2004) households in the state bounced more checks, complained more frequently to the Federal Trade Commission about lenders and debt collectors, and were more likely to file for Chapter 7 bankruptcy when compared to households in other states.
Most customers use payday loans responsibly. Customers use short-terms loans as intended and most pay them back within the terms of the loan. In a recent study, 64.4% of payday loan customers reported that the term of their loan was less four weeks.
Payday loans are two-week loans—not annual loans, so the 390% annual percentage rate cited by critics is misleading. Payday loans are two-week loans—not annual loans, so the 390% annual percentage rate cited by critics is misleading. The typical fee charged by payday lenders is $15 per $100 borrowed, or 15 percent for a two-week loan. The only way to reach the 390% APR is to roll the two-week loan over 26 times (a full year), which would be impossible. The Community Financial Services Association Best Practices limits rollovers to four or the state limit, whichever is less.
All payday loan customers have a steady income and active checking account, both of which are required to receive a payday loan.
The payday loan industry is heavily regulated. The payday loan industry is regulated in 34 states and the Community Financial Services Industry is working to have it regulated in all 50 states.
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