Best Practices

CFSA Myths Vs. Reality

Myth: Payday loans are extremely expensive and have exorbitant interest rates.

Reality: Payday advances are two-week loans—not annual loans. Industry critics often cite payday advances as having a "391 percent annual percentage rate" which is misleading. The typical fee charged by payday lenders is $15 per $100 borrowed, or a simple 15 percent for a two-week duration. The only way to reach the triple digit APR is to roll the two-week loan over 26 times (a full year). State laws and industry best practices simply do not allow this to happen. Many states do not even allow one rollover. In states that do permit rollovers, CFSA members limit rollovers to four or the state limit—whichever is less.
Even if APR were an accurate representation of the fees associated with a payday advance, the figure pales in comparison to the realistic alternatives considered by consumers.
• $100 payday advance with a $15 fee = 391% APR
• $100 bounced check with $56 Non-Sufficient Funds & merchant fees = 1,449% APR
• $100 credit card balance with a $37 late fee = 965% APR
• $100 utility bill with $46 late/reconnect fees = 1,203% APR

Myth: Payday loans trap borrowers in a never-ending “cycle of debt.”

Reality: Numerous studies corroborate a public policy analysis from Clemson University that concludes, “There is no statistical evidence to support the ‘cycle of debt’ argument often used in passing legislation against payday lending.”
A 2010 survey by the American Payroll Association found that 71.6 percent of American employees are living paycheck to paycheck, a situation in which a family may be unable to absorb unexpected expenses without short-term loans. The vast majority of Americans, undeniably, use payday advances responsibly and, as intended, for short-term use. State regulator reports and public company filings confirms that more than 90 percent of payday advances are repaid when due and more than 95 percent are ultimately collected.  
States’ law and CFSA Best Practices limit the number of times a customer can be in a loan. In most of the 32 states that allow payday lending, rollovers or loan extensions are either limited or prohibited. In states without limits, CFSA members limit the number of rollovers to four. Should a customer of a CFSA member company have difficulty paying back a loan when due, for whatever reason, he or she may enter into an Extended Payment Plan, a provision of the CFSA's Best Practices, that allows the loan to be repaid over a period of additional weeks. This option is provided to customers for any reason and at no additional cost to the borrower.

Myth: Payday lenders target poor people and minorities.

Reality: While critics of the industry assign labels to payday advance customers in an attempt to further their political agenda, the fact is that CFSA members provide services to a broad cross section of Americans because there is widespread demand. Just like Home Depot and Costco, payday advance stores are located in population centers that are convenient for where customers live, work, and shop.
Increasingly, banks and credit unions are not serving the financial needs of communities. In an effort to identify and quantify the extent to which insured banks outreach, serve, and meet the banking needs of unbanked and underbanked households, a 2009 FDIC survey looked at the basic banking and other financial services currently offered. The survey found that while banks are aware of significant unbanked and underbanked populations in their market areas, the efforts to serve those customers have been minimal. According to the survey, "73 percent of banks are aware that significant unbanked and/or underbanked populations are in their market areas, but less than 18 percent of banks identify expanding services to unbanked and/or underbanked individuals as a priority in their business strategy.[1]"
Payday advance customers are typical hard-working adults who may not have savings or disposable income to use as a safety net when unexpected expenses occur. Importantly, an analysis of consumers' use of payday loans found that 88 percent of customers were satisfied with their last advance.
Here are the facts:
• 41 percent of payday loan customers earn between $25,000 and $50,000 annually; 39 percent report incomes of $40,000 or more;
• 53 percent are under 45 years of age; 63 percent have children at home; only 9 percent are 65 or older;
• 90 percent have a high school diploma or better, with 54 percent having some college or a degree;
• 85 percent use other forms of credit; 54 percent have major credit cards;
• 100 percent have steady incomes and active checking accounts, both of which are required to receive a payday loan or advance.[2]

[1] FDIC Survey of Banks' Efforts to Serve the Unbanked and Underbanked: Executive Summary of Survey Findings and Recommendations, February, 2009 - PDF [2] George Washington University School of Business, Gregory Elliehausen. An Analysis of Consumers' Use of Payday Loans; January 2009.


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