Payday Lending & Predatory Lending
A "payday loan" is a short-term loan made for seven to 30 days for a small amount. Eighty percent of all payday loans across the country are reportedly less than $300. Fees charged on payday loans generally range from $15 to $30 on each $100 advanced. Thus, a typical example would be that in exchange for a $300 advance until the next payday, the borrower writes a postdated check for $300 and receives $255 in cash-the lender taking a $45 fee off the top. The lender then holds on to the check until the following payday, before depositing it in its own account. Qualifying for a payday loan doesn't require a credit check, the application is simple, and the entire transaction can take less than an hour. All that a prospective borrower typically needs is a home address; a valid checking account; a driver's license and Social Security number; a couple of pay stubs to verify employment; wages and pay dates; and minimum earnings of at least $1,000 a month.
Payday loans are not typically offered by depository institutions, but rather "provided by standalone companies, by check cashing outlets and pawn shops, through faxed applications to servicers, online, and via toll-free telephone numbers" (Robinson, 2001; see also Said, 2001). Virtually no payday loan outlets existed 15 years ago, but industry analysts estimate there are now as many as 22,000 of them (Bair, 2005). Today, there are more payday loan and check cashing stores nation-wide than there are McDonald's, Burger King, Sears,J.C. Penney, and Target stores combined (Karger, 2005). Industry sources estimate more than a sixfold growth in payday loan volume in the last few years, from about $8 billion in 1999 to between $40 and $50 billion in 2004 (Murray, 2005). In 2004, payday lending generated an estimated $6 billion in finance charges (USA Today, 2004).
Predatory lending is the common term for various types of consumer loans that charge high interest rates in order to profit from borrowers. This I-CAN report examines three common types of predatory lending: car title loans, pay day loans, and refund anticipation loans.
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