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Payday Loans: the Other Side of the Story

[Jan 16, 2009.]


Payday loans get such negative coverage in the mainstream media that it seems only fair at least occasionally to give the industry's side of the story. This blog recently received two press releases that reflect that side.

Billions to Borrow

The first came from the Community Financial Services Association of America (CFSA), an industry body that represents a large number of lenders. It pointed out that the amount of money levied in fees and interest for storefront payday loans is dwarfed by that charged by banks and credit unions for other forms of immediate, unsecured, short-term credit. These include bounced check fees, late payment penalties, and overdraft programs.

According to the CFSA, Americans will overdraw their accounts 1.22 billion times this year, and will pay more than $35 billion in consequent charges. By comparison, storefront payday loan fees are forecast at $6.8 billion over the same period.

A Common Problem

The second press release came from Bretton Woods Inc. (BWI), a bank strategy consulting firm based in Georgia. Its report suggests that, nationwide, each household with a banking account incurs non-sufficient funds (NSF) fees an average of 12.7 times a year.

Of course, many households will never dip into the red, but the 20.3 million that account for the majority of NSF items pay a heavy price. On average, they are each charged $1,472 in annual NSF fees.

Comparing Rates

The CFSA quotes a Federal Deposit Insurance Corporation (FDIC) report that suggests that nationally the median overdraft transaction charge is $27, and the median transaction size is $36. It then uses those figures to calculate that the annual percentage rates (APRs) charged by banks and credit unions for NSF transactions work out at anything between 1,067 percent and 3,520 percent.

By comparison, someone who takes out a typical payday loan, and is charged $15 for borrowing $100 will pay an APR of 391 percent.

Of course, the payday loan industry does not like APR figures because its products are designed to be used only in the short term. But those who attack payday lenders for levying triple-digit APRs should recognize that many banks charge quadruple-digit annualized rates for similar advances.

And consumers should realize that it is often cheaper to take out a payday loan rather than incur NSF charges from their bank or credit union.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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