Banking, Credit, Debt 

Pay Day Loans Have Equally Bad Financial Friends

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Pay day loan shops (and cash checking and other similar short term loan shops) are often singled out as places that prey on consumers in a tight spot. While I don’t dispute that, I want to point out other places that also prey on consumers in a tight spot that don’t often get the spotlight.

Pay Day Loans Are Bad

Don’t get me wrong, pay day loans are horrible products for consumers because of their high fees, high interest rates, and their propensity to become financial sinkholes. It’s the financial version of someone going in for a routine cavity filling and coming out with a lobotomy. You just need a little extra help to get you to the next pay day but end up paying for years. According to this warning by the FTC, they give an example in which “the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times [42 calendar days], the finance charge would climb to $60 to borrow $100.” $15 to start and 391% APR is horrible but let’s compare to some of these other products.

Refund Anticipation Loans

Refund anticipation loans, tax rebate loans, assisted refund loans, etc. are horrible horrible, don’t ever get a refund anticipation loan. These products are often highlighted as preying on consumers but I felt they should be mentioned anyway. Given the fervor over pay day loans, you’d think a loan with a $30 activation fee, $20 check processing fee, and a 36% APR would get a little more heat than it does. $50 to start plus 36% APR on funds that are guaranteed (if the tax preparer does their job right) by the IRS… seems a little rougher than the pay day loans, which are loans on funds that are not guaranteed.

Bank Fees

According to Bankrate’s 2007 bank study, bank fees are on the rise. Big time. A bounced check will cost you $28.23, average ATM surcharge will run you $1.78, and the average monthly service fee on a checking account was $11.72 (don’t ever pay a fee for a checking account). You’d think that they were lending you money given those fee values! I can understand the headache of a bounced check but let’s get real here, bounced checks never come alone. In fact, considering banks withdraw the largest amounts first, you’re more likely to see multiple bounces than a single bounce.

Credit Card Fees

Again, credit card companies have come under heat too but it still bears highlighting that they’re practices are closer to pay day loans than they are to the Fed. If you make your payment late, most places will charge you somewhere between $20 and $30, with the bias towards $30. Interest rates? High, plus companies have been mailing out letters notifying people that their rates have gone up for no reason. I’ll leave it at that since the credit card industry does take a lot of heat for their practices.

So as you can see, pay day loans are horrible but there are a lot of other horrible and more mainstream products out there that simply don’t get the same exposure. Bouncing a check is like missing a payment which is like taking out a pay day loan, in terms of cost, but at least with a pay day loan you get something out of it (a horrible horrible loan!).

{ 8 comments, please add your thoughts now! }

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8 Responses to “Pay Day Loans Have Equally Bad Financial Friends”

  1. Frugal Dad says:

    As far as I’m concerned these pay-day loan places should be made illegal. It’s really nothing more than predatory lending in person. Have you ever noticed that the worst zip codes have the most “cash-advance” shops?

  2. jim says:

    Well, unfortunately those cash advance places are one of the few places that people can go to get their checks cashed if they don’t have a bank account.

  3. jane says:

    Oh yeah, bank account fees. I just opened up basic accounts at Bank of America b/c I am moving cross country and they have branches in both my home state and my new. I bank with USAA and am perfecally happy with them but with buying selling a home getting a certified check etc. I figured hey for a couple of months no big deal to get a simple account for convience. I am not going to switch my direct deposit, or keep a lot of money there or do any else of the like so I figured I be paying some account maintence (would qualify for the free account promotions) but it wouldn’t be all that much. Thank god they had a one year waiver promotion going on for the accounts, its something like $12 for checking $6 for savings a month. If I was cashing a work check in there and had little left over to save it’d be cheeper to use a cash checking place.

  4. Adam Williamson says:

    I’ve little to no experience with Pay Day Loans (though they are illegal in MA) so other than going on what I hear they have almost no use. I say almost because they do have a use, to make a large profit for the lender.

    I’ve had quite a bit of experience with Refund Anticipation Loans (RAL) and Refund Anticipation Checks (RAC). I was employed by H&R Block (and look foward to working for them again next season) for the first half of this tax season. I did my best to convice people to just wait for the checks to come in the mail. I would have had my contract extended till April 15th except that I sent to many of my clients to free file locations. Every single person I dealt with who got the RAL or an IRAL (higher fees, some money when you walk out, the rest as a RAL in 1-2 days) did so because they needed cash immediately. The other general impression was that they didn’t mind the fees because they felt it wasn’t their money they were spending (in some cases it wasn’t, but I’m not a fan of people who purposely work only long enough to max out their EIC). The proliferation of RAL’s is due to most people thinking of their tax refund as free money they are getting back from Uncle Sam instead of as an interest free loan to the government.

    Bank Fees:

    Stick with your local credit unions if possible, though their fees are going up, they don’t climb nearly as fast as fees at banks. As far as bank of america is concerned, I am a student doing field work so I can make use of their free student checking (with direct deposit, otherwise it’s $12/month) and free savings. If it wasn’t for my “reward’s” program with them (Keep the Change, and it is a decent program), I would swap all my finances over to one of the two credit unions I am a member of.

  5. MoneyBlogga says:

    I have never had to take out a pay day loan but we have plenty of storefront outlets in town. I don’t see any of them closing down and so I am guessing that they do enough business to stick around. My feeling is that these places are no better than loan sharks.

  6. you know, i don’t like them, but i heard a pretty decent commentary on them on npr, and one valid point is that they certainly serve a need. there are many, many people that fall back on payday loans at one point or another and it means the difference between having utilities cut off or not in some cases. i know there’s talk of making them illegal, but then other less savory lending folks — with much more severe interest rates and other measures — stand to gain a lot more business.

  7. dunwithpdl says:

    Once you get into them, it is quicksand, no way to get out. We was in for over a year. We ended up at two places, for the maximum…here in Ohio it is $800.00. The only way we got out, was to let the checks bounce all over the place. It may have costs us $497.00 in bounced fees, but then we were done. It had previously been $450.00 EACH & EVERY MONTH while we tried to figure out how to get out. They won’t even consider letting you make 2 equal payments. Paid in full is all they will accept. I finally refused to pay, and let them bounce. We suffered, but now we are done! My only regret…..I didn’t do that 11 months ago. I figured it up, in that years time, we lost over $6,000. They are nothing more that legal loan sharks. I am extremely surprised no one ever went in and shot the place up.

  8. jen says:

    I just looked online at money mutual because we are going through some tough times right now and I needed some money. I gave all my personal info. trying to just find a quote on the money mutual website. Now reading up on all of this I am frightened of what they are going to do. Any more advise? I live in MA and apparently it is illegal.

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