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Myth vs Truth
The truth about payday advances
The realities of payday lending are vastly different than the myths and propaganda spread by payday loan critics. The following is a straightforward and honest examination of payday lending to help separate the facts from fiction.
Myth#1: Payday loans have unreasonably high interest rates.
Truth: A payday advance must be paid back within a relatively short time period, and unlike other financial services, the fee does not compound interest. This product provides a proportionate remedy to meeting working people's short-term needs. And payday loan customers say they appreciate why a payday advance, with a one-time fee, can be less expensive than taking on the costs, for example, of bouncing a check, missing a credit card payment or neglecting a bill.
As required by law, the annual percentage rate (APR) is always disclosed for these products. But because of the short duration of a payday advance, the APR comparison is a misleading one. Payday advances are generally for two-week periods; they're not annual loans. So the typical fee of £25 per £100 borrowed equals 25 percent. To reach the triple digit APRs quoted by critics, a consumer would have to renew an advance over and over. For example, critics often cite in excess of 1500 percent APR as an average for a payday advance. But the only way to reach this rate is to rollover an advance every two weeks for an entire year-26 times! This is unrealistic considering that most companies do not even allow one rollover more than twice.
And let's consider the APR of some so-called alternatives to payday advances:
• £100 bounced check with £54 insufficient funds fee equals 1,409 percent
• £100 credit card balance with a £37 late fee equals 965 percent; and
• £100 utility bill with £46 late/reconnect fee equals 1,203 percent.
Myth #2: Payday loans trap borrowers in a never-ending "cycle of debt."
Truth: The "cycle of debt" catchphrase is the critics attempt to portray our industry as taking advantage of people. They use annual percentage rate (APR) exaggerations to paint a picture that payday loan companies greedily profits by forcing our customers into advances that they cannot afford to repay.
But no one benefits in this model and that is why our centers and service representatives work with customers to find an advance amount that matches, but does not exceed, their needs. If a customer is unable to pay back an advance within the arranged timeframe, some companies offer an Extended Payment Plan to allow customers a longer time period to repay at no additional charge.
Payday advances can be a good and appropriate choice for consumers who seek a measured and responsible tool for managing their cash flow, particularly balanced against the cost of bouncing a check or missing a credit card payment. Indeed, millions of consumers have avoided excessive credit card late fees and interest, high insufficient funds fees and other punitive costs for missed payments.
Myth #3: Lenders prey on unsophisticated customers.
Truth: Payday advance customers say they understand the payday transaction and the value of the product compared to other options, and choose a payday advance because it saves them money. A payday advance can be the right option for those who experience unexpected expenses or other sudden financial needs, and have the ability to pay off the debt in a timely manner.
Nearly 90 percent of our customers have graduated with a college. Ninety-two percent of customers think payday lenders offer a valuable service and 90 percent are satisfied with their understanding of the terms and costs of payday advances. Nearly half of our customers own their home, and our customers' median household income is £20, 257. These statistics show that payday loan customers are not the uneducated, unsophisticated people who the industry critics seek to portray.
Payday loan customers are overwhelmingly happy with the product, registering very few complaints. More than 95 percent of payday advances are ultimately paid and more than 90 percent are paid when due.
Myth #4: Payday lenders provide money to people who cannot afford to pay it back.
Truth: Critics of payday loan companies seek to perpetuate the idea that the payday advance industry exploits the downtrodden. They have created a misconceived image of the customer base. Actually, payday advance customers represent the heart of the UKs middle class-consider these statistics:
Millions choose a payday cash advance as a dignified, discreet, and often less costly solution for cash flow problems, without asking family for money or risking personal items as collateral;
If payment cannot be made within the original contract, an Extended Payment Plan may be arranged, giving customers the option of repaying advances over a longer period of time at no additional charge;
70% of customers choose payday cash advance for convenience; only 6% because there was no alternative;
92% say payday cash advance is a useful service;
Average age of a payday cash advance customer is 39;
86% have a college diploma or better;
45% own their own homes; and
100% have a steady income and active checking account, both required for a payday cash advance.
Myth #5: Payday lenders oppose regulations of the industry.
Truth: Most payday loan companies are registred
to the Consumer Credit Act, whose mission is to promote laws that provide substantive consumer protections and to encourage responsible industry practices.
The majorities of payday loan companies comply with the Truth in Lending law and provide full and upfront disclosure of the terms and costs of an advance. And strongly support programs that raise consumer's awareness about financial literacy, and efforts to educate them about making sound long-term decisions related to their money.
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