Yet, some folks continue to take out payday loans, and sometimes to take them out week after week. They argue that the payday loan fee is relatively small, regardless of what the interest rate on the sheet of paper they signed says.

“So, what if the Annual Percentage Rate is 400 percent? I’m not borrowing for a year, just for 2 weeks” they say. Then, they wind up renewing the loan over and over again, sometimes for a year or more.

Let’s take a look at some of the basic math involved in a payday loan. Let’s say your lender wants to charge you $8 for each $100 you borrow. That’s not too bad, right? It’s actually very low – many payday lenders may charge as much as three times that amount. For argument’s sake, though, let’s stick with the $8 per $100 borrowed.

If you need $200 to get your car fixed, you’re going to pay the lender $16 to get you through until next payday. That doesn’t sound like a bad deal. Here’s the problem, though: chances are you didn’t budget $200 from that next paycheck to fix your car, either. So, you’ve got to cut back somewhere else (think Macaroni and Cheese for 2 weeks) or you’re going to have to renew the loan.

The majority of borrowers renew the loan for at least one more pay period. So, let’s say you do just that. Now, you’re at $32 in fees for that $200. It’s getting a little bit hefty, now. Now, you’re at or past what your bank would charge you if you’d have bounced a check.

So, come next payday, you decide that, no matter what, you’re paying part of the loan. So, you pay off $50 of it and renew the rest. Now, you’re up to $44 in fees. If you do the same thing for the next two pay periods, you will have had the loan for about 3 months and paid a total of almost $60 in fees.

The truth is that it takes most folks much longer to pay off their payday loans without renewing them, and by the time it is all said and done they’ve paid more in fees than the original loan amount. That’s just not a sound financial situation. Unless you’ve got no other recourse and it’s a matter of something that can’t wait, you should avoid taking a payday loan.

Photo via lisa_eglinton

Payday Loan Statistics

In the stores where they offer payday loans, EZcorp lends up to $1500. The average amount of the loans they make is $555. The terms are generally less than 30 days and average 18 days. The due date for loan repayments fall on their customer’s paydays.

The fee they reported that they earn is 20% of the loan amount. So, if they loaned out $500, the company would receive $100 in fees (or interest).  For the fourth quarter they reported an increase of $2.7 million in payday loan fees.

In many of their stores, EZcorp also offers longer term unsecured loans. These are usually terms of five months with ten equal installments also due on their customer’s paydays. The loan principle amounts range from $1525 to $3000 but average about $2070. With each payment, they report that they earn a 10% fee of the initial loan amount.

Auto Title Loans

At many of their stores, EZcorp also offers auto title loans. This is where you borrow money secured by the title of your car. They are 30 days loans. EZcorp reported loan principle amounts ranging from $100 to $9000 with the average loan at around $700. They earn a fee of 12.5% to 25% of the auto title loan amounts. This means that with a $1,000 loan they can receive up to $250 in fees.

Photo via nDevilTV

Click to see the graphic!

You think Starbucks and McDonalds are everywhere, payday loan centers put these places to shame. This info graphic lays out the facts.

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<a href=”http://www.paydayloans.org/payday-loans-vs-starbucks-vs-mcdonalds/” mce_href=”http://www.paydayloans.org/payday-loans-vs-starbucks-vs-mcdonalds/”><img src=”http://www.paydayloans.org/wp-content/uploads/2010/01/PL-BillionsandBillions_v5.jpg” mce_src=”http://www.paydayloans.org/wp-content/uploads/2010/01/PL-BillionsandBillions_v5.jpg” border=”0″><br />Payday Loans vs Starbucks vs McDonalds</a>

Click to see the graphic!

Taking your first payday loan puts you in the fast lane of debt. This graphic shows how your life turns to ruin when you start using payday loans.

Embed the above image on your site
<a href="http://www.paydayloans.org/the-road-to-ruin-with-payday-loans-infographic/"><img src="http://www.paydayloans.org/wp-content/uploads/2009/11/paydayroadtoruin.jpg" border="0"><br />The Road To Ruin With Payday Loans</a>

Click to see the graphic!

The payday loan industry isn’t just corrupt, it is like a monster that will destroy your bank account and throw you into debt. This info graphic lays out the facts.

Embed the above image on your site
<a href="http://www.paydayloans.org/debtzilla-the-payday-loan-industry/"><img src="http://www.paydayloans.org/wp-content/uploads/2009/11/debt640.jpg" border="0"><br />Debtzilla – The Payday Loan Industry</a>

Click to view the graphic!

It’s easy to get confused on what is real and what is fake when it comes to payday loans. Sure, their slogans sound enticing and they seem like they just want to help you out – but they are really out to get your money. Use this graphic to learn the truth behind the villainous industry.

Embed the above image on your site
<a href="http://www.paydayloans.org/smoke-and-mirrors-the-payday-industry-pic/"><img src="http://www.paydayloans.org/wp-content/uploads/2009/11/smoke1.jpg" alt="smoke1" title="smoke1" width="640" height="464" class="alignnone size-full wp-image-172" border="0" /><br />Smoke and Mirrors: The Payday Industry</a>

Payday loans were first legalized in the 1990′s. The idea is simple: Allow almost anyone to take out a small loan and charge them a flat fee with a short deadline. The average loan is $350 and average loan fee is over $50.

Borrowers write a personal check that is post dated and the payday location holds it until the original loan is paid off. The borrower must pay back the loan or they are forced to deal with a bounced check and other financial consequences.

The majority of borrowers entrap themselves by never paying off the original loan and instead paying the loan fee to take out another loan to pay off the first. While this premise sounds bad enough, there are many other aspects of the payday industry that are just as shocking.

1. 76% of total loan volume comes from repeat loans

The payday industry operates in 35 states across nearly 23,000 locations. In the course of a year the industry generates $27.2 billion of loans. However $20.6 billion of the loan volume, 76%, derives from “churned” loans. A “churned” loan is defined as a loan made within the same two-week period in which a previous loan is paid off. Two weeks is the normal deadline for payday loans.

The vast majority of business stems from the borrowers inability to repay the original loan, causing them to immediately take another out and pay an additional fee. These are not one time loans, people become entangled in multiple loans and the fees begin to pile up.

2. The enormous amount of churned loans amounts to $3.5 billion in profit from fees

This is where the payday industry makes their money. Where your credit card only charges you interest if you fail to pay off the entire amount of a purchase, you pay upfront a flat fee to simply take out a loan. Since 76% of loans are repeat loans, the industry makes profit by getting the borrower to keep paying for loans because of their inability to pay off the initial loan. The average fee is $17.50 per $100 borrowed and for many this seems miniscule, but it adds up over the course of a year if not remedied.

3. There are two payday locations for every Starbucks

There are 11,000 Starbucks locations in America. There are 23,000 payday locations. So every time you complain or hear a complaint about the ridiculous number of Starbucks on every corner, take a second and understand there are twice as many payday locations in America.

www.csun.edu/~sg4002/research/star-bucks_pdlenders.xls

4. In the 29 of 35 states where payday lending is legal there are more payday locations than McDonalds

Out of the 35 states that allow payday stores, there are 12,400 McDonalds compared to over 23,000 payday loan locations. Again, pretty shocking statistic considering we believe McDonalds to be one of the most ubiquitous businesses in our country.

http://www.csun.edu/~sg4002/research/mcdonalds_by_state.htm

5. The lowest APR cap is 156% in Texas and seven other states have no interest caps. The standard credit card APR is 16-18%

APR is annual percentage of rate. This is the interest rate for a whole year as applied to a loan. Basically, the APR calculates how much interest you pay if you borrowed the loan for a full year. For example, a payday loan fee of $17.50 per $100 for a two week loan equates to 455% (17.5% x 26 weeks).

Payday APR is astronomical compared to credit cards and other methods of borrowing. Payday locations trick potential borrowers by not revealing this statistic, instead focusing on the loan fee. Almost all borrowers do not realize the interest is in fact horrendous compared to other alternatives such as a regular cash advance or even loan from a friend for free.

6. $91.01 is the difference you pay by taking a payday loan versus a cash advance via credit card on a $300 loan paid in 30 days

Payday loan: $17.50 per $100 loaned, 15 day term with 1 rollover = $105 total fees

Cash advance via credit card – 20.23% APR with a 3% lending fee = $13.99 total fees

7. It’s frighteningly easy to obtain one of these loans

All a customer needs is a bank account, proof of income and identification. No location performs a full credit check or analysis to see if the loan is healthy in regards to the customer’s financial status. It’s harder to apply to many credit cards than it is to yank out a 455% APR loan.

8. Everything is due at once. You cannot make payments

This may not seem bad at first thought. Compare it to alternative loan methods and you see the disparity. Payday loans are short term loans that require you to pay back the entire amount or be forced to take out another loan.

Alternatively, many credit cards offer a grace period of repayment upwards of 30 days before any interest is charged. Even then, you can make small payments on purchases and combined with the relatively low APR on credit cards, this isn’t a big problem for most people. With payday loans, you are bound to pay the entire sum up front, so most people are forced to take another loan out immediately, thus paying the drastically high APR yet again. Either way, you are paying way more for a loan than you should be.

9. The industry constantly tries to undermine the law

Lots of lenders use sham transactions where they attempt to cloak the loans. An example is creating internet payday sites with rebate schemes that can avoid small loan laws in certain states. Texas lenders often operate as unregulated credit services organizations to blur their definition under state law. Locations in Illinois and New Mexico offer high cost installment loans instead of single payment loans to evade state law restrictions.

10. The industry targets minority neighborhoods

Statistics reveal in California payday lenders are eight times more concentrated in neighborhoods with the largest percentage of African Americans and Latinos. While the payday industry has been officially banned in North Carolina, many lenders still operate because of their affiliation with out of state banks. Of these that remain, they are three times more concentrated in the minority neighborhoods than Caucasian.

Information taken from http://www.paydayloaninfo.org/lstatus.cfm and http://www.responsiblelending.org/payday-lending/.