Payday Loan Companies Exploit Poor Americans for Billions

As many as twelve million Americans are using high interest payday loans.

The payday loan companies, which are usually located in strip malls, are becoming the only choice for low income Americans who cannot pay bills or use credit cards to cover their basic needs, reports NBCNews.com.

Payday loans are basically a two-week advance on a paycheck, which could actually be a Social Security payment or a welfare payment. The payday loan companies charge enormous rates of interest, often burying poor Americans in debt even further than they were before.

Some states have banned these types of loans, but they are still available via the Internet to anyone.

“These products may become harmful for consumers when they are used to make up for chronic cash flow shortages,” said Consumer Financial Protection Bureau (CFPB) in a recent report.

The CFPB is trying to fix this mostly unregulated alternative lending industry, which is able to violate state laws on interest rates by offering loans over the web.

Conservatives have often claimed that if government regulations would "just get out of the way" then the U.S. would thrive on new wealth, which is certainly true for payday loan companies.

Payday loan users pay about $15 to get a two-week loan for every $100 they borrow.  On an annual basis, that "reasonable" rate is actually 391 percent. In its report, the CFPB said that that an average payday customer pays $458 in fees to borrow $350.

The payday industry's lobbying group, the Financial Service Centers of America, defends these costly loans by shifting the blame onto traditional banks that do not offer accounts to some low income people, or do not build branches in poor neighborhoods.

According to a Pew survey, earlier this year, 70 percent of payday borrowers use the money to pay for everyday living expenses. In total, the payday companies pocketed 7.4 billion in interest rates and loans in 2012.

“The sweet spot [for lenders] is somebody who is struggling to pay their regular living expenses, but somebody who can afford to pay the fee every two weeks,” said Pew researcher Nick Bourke. “That’s where they make their money.”

According to a 2011 report by CNBC.com, some mainstream banks actually offer payday loans under different names to protect their public images.

U.S. Bank, Fifth Third Bank and Wells Fargo are offering payday loans (at interest rates averaging between 225 and 300 percent) under names such as Ready Advance, Fast Loan and Early Access, according to the Center for Responsible Lending (CRL).

Source: NBCNews.com, PewStates.org, CNBC.com


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