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Payday lenders need to be more transparent

A couple weeks ago on Marketplace Morning Report, a payday loan lender defended his industry, saying as long as customers did the math, he wasn't doing anything wrong. Commentator Helaine Olen begs to differ.

Every year, 12 million Americans take out high-interest, short-term payday loans. The industry likes to claim it's offering a needed service and helping people who can't get credit anywhere else. Indeed, according to a study by the Pew Charitable Trusts, more than a third of borrowers simply have nowhere else to turn. And first timers are almost certain to be using the money for expenses like mortgage, utilities and credit card bills.

But something else is going on, too. The industry claims to be transparent, offering would-be customers documentation showing how much their loans will cost if they pay them off in full at the end of a two-week cycle. There's only one problem: it takes the average borrower not two weeks, but five months to make good on a payday loan. As a result, they pay to roll the debt over again and again, ultimately shelling out more than $500 in interest for a $375 loan.

Proponents of payday loans say buyer beware; customers are responsible for doing the math to determine what their loan will ultimately cost. But borrowers aren't expecting to take on five-month loans, so they probably don't think they need to work out those numbers. More than three-quarters of them say they rely on loan providers to give them the facts about fees, making claims of transparency disingenuous at best.  

Here's hoping the Consumer Financial Protection Bureau can take this issue on, and insist the industry provide disclosure based on how people actually pay back payday loans in the real -- not ideal -- world.

About the author

Helaine Olen is an essayist and author of book "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry."
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Payday loan lenders definitely fill in the need - people need credit and if they don't qualify for standard credit products such as credit cards or overdraft lines, they turn to payday loans. Thee need is there, the market works to meet the need. The problem is that market cost is too high and people who take out such loans simply cannot afford them. The same problem when you buy an expensive car and then fall back on your payments because you don't have a five digit salary. Thus, the solution is to apply strict affordability test to such borrowers BUT then no loans will be issued because most borrowers simply won't pass the affordability test - vicious circle.
Ref: http://www.prweb.com/releases/2011/9/prweb8815140.htm

I think that consumers should be more responsible when they apply for payday loans. They need to do math to understand if they can pay off these high interest loans or it’s worth to consider alternative options. Also it’s important to understand the difference between secured and unsecured loans and realize that unsecured ones always have higher interest rates because the lenders take higher risk. Payday loans are intended for financial emergencies and it’s not worth to use them just to cover some daily expenses. Customers who are going to apply for online cash advance should know the interest rate on a loan they are going to get and how much money this loan will cost to them.
Jennifer from https://paydayloansat.com/

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