The Truth in Lending Act requires all lenders including online payday loan lenders to disclose the cost of the loan in writing before asking the consumer to sign any agreement. They’re supposed to provide this information in terms of the finance charges and is the annual percentage rate. Going through this information one realises how expensive payday loans actually.
Taking the example of one online payday lender, you’ll see that this lender charges $17.5 per every hundred dollars borrowed. On a 10 day loan your effective annual percentage rate is nearly 640%. This is most 20 times the interest rate on most of the credit cards. If you take out a 14 day $300 loan and cannot repay it in the first two months you would end up paying more than $200 in payday loan fees.
2006 report by Centre for Responsible Lending reveals that the typical payday loan borrower ends up paying $793 in interest on a $325 loan. This is not because the payday lender charges this kind of fee upfront but because typically a payday loan borrower rolls over his loan repeatedly till he has accrued huge amounts of money as interest before he can pay of the loan completely. Since payday loans typically target and take advantage of poor consumers borrowers often find themselves taking out new payday loans to cover the old payday loans. This results in them frequently rolling over their existing payday loans as well as taking new once which makes them end up owing thousands of dollars on what started out as only a few hundred dollars of debt.
Payday loans take advantage of Poor Consumers
statistics have repeatedly showed that payday loan companies take advantage of borrowers from the polo section of society. You will be hard pressed to find any payday loan stores in upper middle class suburbs of the city where borrowers could actually afford to repay the loans. You’ll find most of them existing in poor poor neighbourhoods and near military bases.