Payday loan (also called payday , payday loan , payday loan , small dollar loan , short-term , or advance loan ) is an unsecured short-term loan, "regardless of whether the loan repayment is associated with a borrower's pay." Loans are also sometimes sometimes referred to as "cash withdrawal," even if the term may also refer to the cash provided to a pre-arranged line of credit such as a credit card. Payday advance loans depend on customers who have payroll and previous employment records. The law on payday loans varies between different countries, and within the federal system, between different states or provinces.
To prevent usury (unreasonable and excessive interest rates), some jurisdictions limit the annual percentage rate (APR) that each lender, including a paying lender, may charge. Some jurisdictions prohibit payday loans entirely, and some have very few restrictions on payday lenders. In the United States, this rate of borrowing is usually restricted in most states by the Uniform Small Loan Act (USLL), with an average of 36-40% APR.
There are many different ways to calculate the percentage rate of an annual loan. Depending on which method is used, the calculated rate may vary dramatically; eg, for a $ 15 fee on a $ 100 14 day payday loan, it could be (from a borrower's perspective) anywhere from 391% to 3.733%.
Although some have noted that these loans seem to carry huge risks for lenders, it has been proven that these loans carry no long-term risk to creditors rather than other forms of credit. These studies appear to be confirmed by the US Securities and Exchange Commission filing at least one lender, which recorded a charge-off rate of 3.2%.
Video Payday loan
Loan process
The basic loan process involves a lender who provides short-term unsecured loans to be repaid on the next payday of the borrower. Typically, some job or earnings verification is involved (through payroll deductions and bank statements), although according to one source, some payday lenders do not verify earnings or run a credit check. Each company and franchise have their own underwriting criteria.
In traditional retail models, borrowers visit a lending-and-borrow shop and get a small cash loan, with payments due in full on the next payment by the borrower. The borrower writes a check that has been decided to the creditor in full amount of loan plus cost. On the due date, the borrower is expected to return to the store to repay the loan directly. If the borrower does not return the loan directly, the creditor can redeem the check. If the account is underfunded to cover the check, the borrower may now face the cost of a bouncing check from their bank in addition to the borrowing costs, and the loan may incur additional costs or an increase in interest rate (or both) as a result of a failure to pay.
In the latest innovation of online payday loans, consumers complete online loan applications (or in some cases through fax, especially when documentation is required). The funds are then transferred by direct deposit to the borrower's account, and loan payments and/or finance charges are withdrawn electronically on the next payday of the borrower.
Maps Payday loan
User demographics and borrowing reasons
According to a study by The Pew Charitable Trusts, "Most payday loan borrowers [in the United States] are white, female, and aged 25 to 44. However, after controlling other characteristics, there are five groups that have higher chances. salary loans: those who do not have a four-year undergraduate degree: house tenants, African Americans, they earn less than $ 40,000 per year, and those who are separated or divorced. "Most borrowers use payday loans to cover the cost of daily living for months -months, not an unexpected emergency for several weeks. The average borrower owes about five months of the year.
This reinforces findings from a US Federal Deposit Insurance Corporation (FDIC) study from 2011 that finds black and Hispanic families, new immigrants, and single parents more likely to use payday loans. In addition, their reasons for using this product are not as suggested by the payday industry for a one time fee, but to meet normal recurring liabilities.
Research for the Illinois Department of Finance and Professional Rules finds that the majority of payday loan borrowers from Illinois earn $ 30,000 or less per year. Texas' Office of the Consumer Credit Commissioner collected data on the use of 2012 payday loans, and found that refinances accounted for $ 2.01 billion in loan volume, compared to $ 1.08 billion in initial loan amounts. The report does not include information about the annual debt. A letter to the editor of an industry expert believes that other research has found that consumers are better off when payday loans are available to them. The Pew report has focused on how payday loans can be increased, but have not yet assessed whether consumers have better rates with or without access to high interest loans. Pew's demographic analysis was based on a random-digit-dialing (RDD) survey of 33,576 people, including 1,855 payday loan borrowers.
In another study, by Gregory Elliehausen, Division of Federal Reserve System Research and Financial Services Research Program at George Washington University Business School, 41% earned between $ 25,000 and $ 50,000, and 39% reported earnings of $ 40,000 or more. 18% have earnings below $ 25,000.
Criticism
In Britain Sarah-Jayne Clifton of the Jubilee Debt Campaign says, "savings, low wages, and unsafe jobs encourage people to take on the high cost debts of rip-off lenders just to put food on the table We need the government to take immediate action , not just to control the rip-off lender, but also to overcome the cost of life crises and cut social protection that drives people to loan sharks in the first place. "
Drain money from low-income communities
It is likely that a family will use an increase in payday loans if they do not have a bank account or underbanked, or do not have access to a traditional deposit bank account. In the context of America, families who would use disbursed salaries disproportionately from blacks or Hispanics, new immigrants, and/or less educated. These people can at least get a credit form with a normal low interest rate. Because payday loan operations charge higher interest rates than traditional banks, they have the effect of depleting low-income citizens' assets. The Insight Center, a consumer advocacy group, reported in 2013 that payday loans cost the community $ 774 million per year.
A report from the Federal Reserve Bank of New York concludes that, "We... tested whether payday loans fit our definition of predators We found that in countries with higher paying loan limits, low-educated households and households with uncertain revenues less likely to be denied credit, but impossible to miss debt payments The absence of higher delinquency, extra credit from paying lenders does not fit our predatory definition. "The warning for this is that under a period of less than 30 days there is a payment, and the lender is more than willing to roll the loan at the end of the period after the payment of another fee. The next report notes that payday loans are very expensive, and borrowers who take payday loans are at a disadvantage compared to lenders, reversing the asymmetry of normal consumer loan information, in which the lender must bear the loan to assess the credit worthiness.
Recent legal journal notes summarize the justification for arranging payday loans. This summary notes that while it is difficult to measure the impact on certain consumers, there are external parties that are clearly affected by the borrower's decision to get a payday loan. The most directly affected are other low-interest debt holders from the same borrower, who are now less likely to be repaid because the limited income was first used to pay the costs associated with payday loans. The external costs of these products can be expanded to include businesses that are not protected by cash-strapped payday customers for children and families who have fewer resources than before the loan. External costs alone, imposed on people who have no choice in this regard, may be quite justification for stronger regulation even with the assumption that the borrower himself understands the full implications of the decision to seek a salary loan.
Advertising Practices
In May 2008, a Credit Charity Credit Action filed a complaint with the Royal Fair Trade Office (OFT) that a paying lender posted an ad violating advertising regulations on the Facebook social networking website. The main complaint is that the APR is not displayed at all or is not shown quite clearly, which is clearly required by the UK advertising standards.
In 2016, Google announced that it would block all ads for payday loans from its system, defined as loans requiring payments within 60 days or (in the US) having an APR of 36% or more.
In August 2015, the Financial Conduct Authority (FCA) of the United Kingdom announced that there was an unauthorized increase in companies, also known as 'clone companies', using the names of other indigenous companies to offer payday loan services. Therefore, it acts as a clone of the original company, as is the case of Payday Loans Now. FCA is strongly advised to verify financial companies by using Financial Services List, before participating in any form of monetary engagement.
Aggressive collection practices
Under U.S. law, payday lenders can use only the same industry standard collection practices used to collect other debts, especially the standards listed under the Debt Collection Debt Practices Act (FDCPA). FDCPA prohibits debt collectors from using abusive, unfair, and deceptive practices to be collected from debtors. Such practices include calling before 8 am or after 9 pm, or call the debtor at work.
In many cases, the borrower writes the check after the date (check with the coming date) to the lender; if the borrower does not have enough money in their account on the check date, their check will bounce. In Texas, a paying lender is prohibited from suing the borrower for theft if the check is no longer valid. One payday lender in the state even asks their customers to write a check date for the day the loan is given. Customers borrow money because they do not have it, so lenders receive checks knowing that it will bounce on check dates. If the borrower fails to pay by the due date, the lender requires the borrower to write a hot check.
The payday lender will seek to collect on the first consumer liability by simply requesting payment. If internal collection fails, some payday lenders may outsource debt collection, or sell the debt to a third party.
A small percentage of payday lenders have, in the past, threatened borrowers in arrears with criminal prosecution for check fraud. This practice is illegal in many jurisdictions and has been criticized by the Association of Financial Services Companies of the American Society, the industry trade association.
Pay day salary set structure
The payday loan industry believes that conventional interest rates for dollar amounts are lower and short term will not be profitable. For example, a one-week loan of $ 100, at 20% APR (weekly composite) will yield only 38 cents of interest, which will fail to match the loan processing fee. Research shows that on average, the price of payday loans is moving upwards, and that the action is "consistent with implicit collusion facilitated by price focal points".
Proponents of consumers and other experts argue, however, that payday loans seem to exist in the classical market failure. In a perfect market of competing sellers and buyers who want to trade rationally, prices fluctuate based on market capacity. Payday lenders do not have an incentive to borrow their prices competitively because the loan is not patentable. So if the lender chooses to innovate and reduce the cost to the borrower to secure a larger market share, competing lenders will soon do the same, negating the effect. For this reason, among other things, all lenders in the payday market pay at or very close to the maximum fees and tariffs permitted by local law.
Supportive attitudes and arguments
Industrial industry profitability
In profitability analysis by Fordham Journal of Corporate & amp; Financial Law , it is stipulated that the average profit margin of seven publicly traded payroll (including pawnshop) companies in the US is 7.63%, and for pure salary lenders is 3.57%. This average is lower than other traditional lending institutions such as credit unions and banks.
Comparatively, Starbucks profit margins for a measured time period exceeded 9%, and comparative lenders had an average profit margin of 13.04%. The comparative lenders are mainstream companies: Capital One, GE Capital, HSBC, Money Tree, and American Express Credit.
Cost according to cost
A study by the FDIC Center for Financial Research found that "operating costs do not match the size of the down payment costs" and that, after deducting fixed operating costs and "unusually high levels of default loss," payday loans "may not necessarily result in a profit extraordinary. "
However, despite the tendency to characterize the failure rate of high holiday payroll salaries, some researchers have noted that these are the normal short-run artifacts of payday products, and that over a longer period of borrowing there is often a point where the borrower is in a state default and then become active again. Actual refunds are no more frequent than with traditional forms of credit, as most payday loans are rolled over to new loans repeatedly without any payment being applied to the initial principal.
The tendency for very low default rates appears to be an incentive for investors interested in payday loans. In their Advance America 10-k SEC filings from December 2011, they noted that their agreement with investors "limits the average actual bill incurred during each fiscal month to a maximum of 4.50% of the average amount of the transaction adjusted for the balance which circulated at the end of each fiscal month for the previous twelve months ". They noted that for 2011, their average monthly bill was $ 287.1 million and their average cost was $ 9.3 million, or 3.2%. Compared to traditional lenders, payday companies also save money by not engaging in traditional forms of guarantee, relying on the easy rollover requirements and small size of each loan as a diversification method that eliminates the need to verify every borrower's ability to pay back. It may be because of this that payday lenders rarely show a real effort to verify that borrowers will be able to pay the principal on their payday in addition to their other debt obligations.
Minimum regulatory supporters for payday loan businesses argue that some individuals who require the use of payday loans have exhausted other options. Consumers like that could potentially be forced into illegal sources if not for payday loans. Tom Lehman, a supporter of payday loans, said:
- "... payday loan services extend small amounts of loans that are not lent to high-risk borrowers, and lend to poor households when other financial institutions do not." Over the past decade, this "credit democratization" has made small loans are available to the mass sector of the population, and especially the poor, who will not have access to any credit in the past. "
These arguments are fought in two ways. First, the history of borrowers turning to illegal or dangerous sources of credit does not seem to have an actual basis according to Robert Mayer's 2012 "Loan Sharks, Interest-Rate Caps, and Deregulation". Beyond the specific context, interest rate restrictions have the effect of allowing small loans in most areas without increasing "loan sharks". Furthermore, since 80% of payday borrowers will roll out their loans at least once because their earnings prevent them from paying principal in the payment period, they often report to friends or family members to help pay back the loan in accordance with the 2012 report from the Center for Financial Services Innovation. In addition, there appears to be no evidence of unmet demand for small dollar credits in countries that prohibit or strictly limit payday loans.
The 2012 report produced by the Cato Institute found that borrowing costs were overstated, and that payday lenders offered traditional lender products simply refused to offer. However, this report is based on 40 survey responses collected at a payday store location. Report author Victor Stango is on the board of the Consumer Credit Research Foundation (CCRF) until 2015, an organization funded by payday lenders, and receives $ 18,000 in payments from CCRF in 2013.
Increased household prosperity
The staff report released by the Federal Reserve Bank of New York concluded that salary loans should not be categorized as "predators" because they can improve household welfare. "Defining and Detecting Predatory Lending" reports "if a paying lender improves household welfare by loosening the credit limit, anti-predatory laws can lower it." The report's author, Donald P. Morgan, defines predatory borrowing as "a reduction in the welfare of credit provision." However, he also noted that these loans are very expensive, and are likely to be made for less educated households or households with uncertain income.
Brian Melzer of Kellogg School of Management at Northwestern University found that payday loan users did experience a reduction in their household financial situation, as the high cost of repeated rollover loans impacted their ability to pay recurring bills such as utilities and rent. This assumes payday users will roll over their loans rather than repay them, which has been shown by the FDIC and Consumer Financial Protection bureau in a large sample sample of payday consumers
Petru Stelian Stoianovici, a researcher from Charles River Associates, and Michael T. Maloney, an economics professor at Clemson University, found "there is no empirical evidence that payday loans lead to more bankruptcy filings, raising doubts on the debt trap argument against payday loans. "
The report is reinforced by Federal Reserve Board (FRB) 2014 study which found that although bankruptcy occurs twice as much among payday loan users, the increase is too small to be considered significant. The same FRB researchers found that payday use did not have a positive or negative impact on household wellbeing as measured by changes in credit scores over time.
Help in the disaster area
A 2009 study by the University of Chicago Booth School of Business Professor Adair Morse found that in areas of natural disasters where payday loans available consumers fared better than in disaster zones where pay day loans were not present. Not only fewer confiscations are recorded, but categories such as birth rates are not negatively affected by comparison. In addition, the Morse study found that fewer people in the area were served by salaried lenders who were being treated for drug and alcohol addiction.
Country only
Australia
Prior to 2009 consumer credit regulations were primarily conducted by states and territories. Some states such as New South Wales and Queensland enact effective 48% annual interest rate limits. In 2008, Australian states and territories referred to the consumer credit power to the Commonwealth. In 2009, the 2009 National Consumer Protection Cover Act (Cth) was introduced, which initially treated payroll lenders no different from all other lenders. In 2013 Parliament tightened regulations on payday loans further introduced the Consumer and Corporate Credit Act Enhancements Act 2012 (Cth) which enacts an effective APR cap of 48% for all consumer credit contracts (including all costs and fees). The payday loan lender falls within the definition of a small credit contract (SACC), defined as a contract provided by a non-authorized retrieval agency for less than $ 2,000 for a period of between 16 days and 1 year, is allowed to charge the establishment fee of 20% in addition to a monthly fee (or a portion) of 4% (effective 48% pa). The payday loan lender falls in the definition of a medium-term credit contract (MACC), defined as a credit contract provided by a non-depositary retrieval agency for between $ 2,000- $ 5,000 may incur a $ 400 establishment fee in addition to interest under the hat law rate of 48%. The paying lender must still comply with the Responsible lending obligations that apply to all creditors. Unlike other jurisdictions, payday loan lenders in Australia who provide SACC or MACC products do not need to display their costs as effective annual interest rates.
Canada
Bill C28 replaces the Criminal Code of Canada with the aim of freeing the lending companies from the law, if the province passes legislation to regulate payday loans. Salary loans in Canada are regulated by each province. All provinces, with the exception of Newfoundland and Labrador, have passed legislation. For example, in loans Ontario has a maximum rate of 14.299% Effective Annual Rate ("EAR") ($ 21 per $ 100, more than 2 weeks). By 2017, major payday lenders have reduced tariffs to $ 18 per $ 100, over 2 weeks.
English
The Financial Conduct Authority (FCA) estimates that there are more than 50,000 credit companies under its widening responsibility, of which 200 are payroll lenders. A salary loan in the UK is a rapidly growing industry, with four times as many people using the loan in 2009 as compared to 2006 - in 2009 1.2 million people took 4.1 million loans, with total loans of Ã,  £ 1.2 billion. In 2012, it is estimated the market is worth  £ 2.2 billion and the average loan amount is around  £ 270. Two thirds of borrowers have annual revenues under Ã,  £ 25,000. There is no limit on the interest rates of payday loans can charge a fee, although they are required by law to declare the effective annual percentage rate (APR). In early 2010 there were many critics in parliamentary payday lenders.
In 2014 some companies are reprimanded and are required to pay compensation for illegal practices; Wonga.com for using a letter claiming to be from a lawyer to demand payment - an official police investigation for fraud is being considered in 2014 - and Gender Money, owned by a multinational EZCorp, for a series of problems by way of enforcement. demanding and collecting money from delinquent borrowers.
Changes in UK law
On April 1, 2014 there was a massive improvement in the way payment of pay and payments.
First of all the FCA will ensure all lenders can comply with two primary goals;
- "to ensure that the company only lends to borrowers who can afford it", and
- "to increase the borrower's awareness of the costs and risks of lending that can not be tolerated and a way to help if they are experiencing financial difficulties".
On top of the main goals of Martin Wheatley, FCA's chief executive officer, said:
- "For many people struggling to pay for salary loans every year, this is a big jump.Because next January, if you borrow Ã, Â £ 100 for 30 days and pay back on time, you will not pay more than Ã, Â £ 24 in fees and charges and someone who took the same loan for fourteen days will not pay more than Ã, Â £ 11.20. That is a significant savings.
- "For those who struggle with their payments, we make sure that someone who borrows £ 100 will never pay back more than Ã, Â £ 200 under any circumstances.
- "There are many strong and competing views to consider, but I'm sure we've found the right balance.
- "Along with our other new rules for payday companies - the affordability test and limits on rollover and sustainable payment authorities - these limits will help raise the standards in sectors that are vital to improving how to treat customers."
To achieve these objectives, the FCA has proposed the following:
- Initial cost limit of 0.8% per day,
- Standard costs remain limited to Ã, Â £ 15, and
- Total cost limit is 100%.
United States
Payday loans are legal in 27 states, and the other 9 allow some form of short-term loans with restrictions. The remaining 14 and the District of Columbia prohibit such practices. Annual percentage rate (APR) is also limited in some jurisdictions to prevent usury. And in some states, there are laws that limit the amount of borrowings a borrower can take at a time.
As for federal regulations, the Wall Street Dodd-Frank Reform and Consumer Protection Act give the Consumer Financial Protection Bureau (CFPB) special authority to regulate all payday lenders, regardless of size. Also, the Military Loan Act imposes a 36% interest rate limit on tax refund and payday loans and car ownership loans made to members of the armed forces active duty and their covered dependents, and prohibits certain conditions in the loan the.
The CFPB has issued several law enforcement actions against payday lenders for reasons such as violating the prohibition of lending to military personnel and aggressive collection tactics. CFPB also operates a website to answer questions about payday loans. In addition, some countries have been aggressively pursuing lenders that they feel are violating the laws of their country.
Payday lenders have effectively utilized the Native American reservation sovereign status, often forming partnerships with tribal members to offer loans over the Internet that circumvent state law. However, the Federal Trade Commission has begun to monitor these lenders aggressively as well. While some tribal lenders are operated by Native Americans, there is also much evidence that is merely the creation of the so-called "rent-a-tribe" scheme, in which a non-indigenous corporation establishes operations in tribal lands.
Variations and alternatives
Alternative for payday loans
Another option is available for most payday loan customers. These include pawnshops, lower-interest credit union loans and more stringent requirements that take longer to get approval, employee access to unpaid wages, credit payment plans, cash payments from employers ("pay raise" ), car loan, bank account protection, credit card advances, emergency community assistance plans, small consumer loans, installment loans and direct loans from family or friends. The Pew Charitable Trusts found in their 2013 study on the way in which users pay off salary loans that borrowers often take out a salary loan to avoid one of these alternatives, only to switch to one of them to pay off a payday loan.
If the consumer owns his own vehicle, a loan with property rights will automatically be an alternative to a salary loan, since a loan with property rights uses the equity of the vehicle as a credit, not on payment history and employment history.
Other alternatives include the Pentagon Federal Credit Union Foundation (PenFed Foundation) Asset Recovery Kit (ARK) program.
Basic banking services are also often provided through their postal system.
The comparison of payday lenders makes
Payday lenders do not compare their interest rates with those of the major lenders. Instead, they compare their costs with overdrafts, late payments, penalty fees and other costs to be incurred if customers can not get any credit.
Lenders can list different alternatives (at a cost expressed as APR for a period of two weeks, though this alternative does not add to their interest or has a long term):
- $ 1000 payday at a cost of $ 15 = 391% APR
- $ 100 bounce check with $ 54 NSF/merchant fees = 1.409% APR
- $ 100 credit card balance with $ 37 late fee = 965% APR
- $ 100 utility bill with $ 46 late/re-connection cost = 1.203% APR
Variations on payday loans
A small portion of commercial banks and TxtLoan companies lend short-term credit via mobile phone text messages offering virtual loans to customers whose payments or other funds are deposited electronically into their account. The term is similar to a payday loan; customers receiving specified cash credits are available for immediate withdrawal. The amount is deducted, along with the cost, usually about 10 percent of the amount borrowed, when the next direct deposit is posted to the customer's account. After the program drew the attention of the regulation, Wells Fargo called the fee "voluntary" and offered to set it aside for any reason. This then lowers programs back in some states. Wells Fargo currently offers a payday loan version, called "Direct Deposit Advance," which charges 120% of APR. Similarly, the BBC reported in 2010 that the controversial TxtLoan charges 10% for the 7 day advance available to approved customers directly via text message.
Loan anticipation of income tax refund is not technically a payday loan (since the payment is refunded upon receiving the borrower's income tax return, not on the next payday), but they have similar credit and cost characteristics. A car ownership loan is secured by the borrower's car, but is only available to borrowers who have a clear right (ie, no other loans) to the vehicle. The maximum amount of the loan is a fraction of the resale value of the car. The same credit facility seen in the UK is the logbook loan which is secured against the car notebook, held by the lender. These loans may be available on slightly better terms than unsecured payday loans, as they are less risky for the lender. If the borrower fails, then the creditor may try to recover the cost by taking back and reselling the car.
Postal banking
Many countries offer basic banking services through their postal system. The US Post Office Department offers such services in the past. Called the US Postal Savings System was discontinued in 1967. In January 2014, the US Postal Inspector General Service Office issued a white paper showing that the USPS can offer banking services, to include small dollar loans for under 30% APR. Support and criticism are quickly followed; opponents of postal banking argue that as payday lenders will be forced out of business because of competition, plans are nothing more than schemes to support postal employees.
See also
- Alternative financial services
- The American Financial Services Association, a trade association representing the payday loan industry
- Bonds payable
- Moneylender loan
- Loan note book
- Merchant advances
- Loan predators
- Loan anticipation loan
- Loan title
- Riba
References
Further reading
- Baradaran, Mehrsa (2015). How to Half Other Banks: Exclusion, Exploitation, and Threats to Democracy. Harvard University Press. ISBN: 9780674286061
External links
- FDIC Guide on Pay Lending
- The Military Lending Act dramatically expands Coverage on 03 Oct 2016
- Federal Register, Military Loan Law, Under Secretary of Defense for Personnel and Readiness
Media related to Payday loans in Wikimedia Commons
Source of the article : Wikipedia
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