Monday, August 3, 2009

Here's one more way poor people are scammed

Have you ever noticed all the loan places that you see when you drive through poor communities in any California city? Most of there are the so-called "payday" loan outlets. They get their names from the practice of loaning against a future paycheck.

The catch is these places charge outrageous interest rates and fees for the short-term loans. In most cases, consumers pay interest and fees of more than 400% for a two-week loan. If they renew the loan at the end of the period, the fees and interest rates go even higher. It puits them into a cycle of debt.

The California Budget Project explains the process this way:

Payday loans are short-term, high-interest-rate loans that are generally provided to low- and moderate-income individuals who need immediate access to cash prior to receiving their next paycheck. Loans are secured with a personal check that borrowers “postdate” to their next payday, at which time the loan must be repaid.

California law allows payday lenders to charge a fee of up to 15 percent of the face value of the check, up to a maximum face value of $300. A borrower who writes a check for the maximum amount – $300 – receives a loan of $255 and pays a fee of $45. Due to high fees and short repayment periods, payday loans carry high implicit annual percentage rates (APRs), with an average APR of 429 percent for payday loan transactions in California in 2006.


This is one more outcome of being poor. If these consumers had better credit, they would get better loans. But they have few choices so they get scammed by the payday lenders.

1 comment:

  1. It would seem these folks don't have a choice but to go to the payday lenders. If they had good credit, they wouldn't be worrying about a $300 loan at 400% interest. Banks only loan to people who don't need the money. In a way, these payday lenders are doing a service -- although they are gouging the heck out of the people they are serving.

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