Doshound aims to help you make informed financial decisions. Learn about payday loans, installment loans, and financial products in general. Learn about borrowing, fees, rates, and payments. Our articles can help you make informed financial decisions to protect yourself and save money. Get the facts so you can make a decision that's best for your situation.
Most payday lenders don't check credit and can deposit $1000 cash into your account over night. Sounds great, right? So what's not to like?
The catch is these loans cost a boatload and not all payday lenders are the same. Be careful and make sure you understand what you are getting into before taking a payday loan.
Here are five key things to know before taking one of these loans:
It's better to wait and skip the loan.
Payday loans are very expensive. Rates are usually based on a flat fee per $100 and can range from $15 to $45. So although it may sound cheap to get $100 now and pay $115 later this is not cheap. This is crazy high compared to other loans like credit cards where the equivalent payback on a two week loan would be $0.61. That's right $0.61 vs $15.00. Payday loans are expensive because they are super convenient and expensive to provide; they rarely make economic sense for a consumer.
Your checking account is debited on payday.
Payday lenders get paid first. Instead of lending money based on credit history they lend money based on the ability to get paid first. They require direct access to your checking account. This means that the moment a paycheck arrives they immediately withdraw fees and principal.
This process is pretty clear upfront so it's not deceptive but it can really add up in fees if you don't have enough money in our account when they try to withdraw funds. They will often try multiple times in one day until they get paid meaning you can get multiple "bounce check" fees. This means that in addition to the $15 you owe the lender you may end up owing your bank another $50 in fees. Make sure you have enough money in your account when the loan is due.
Payday loans are due in full on your next payday.
Payday loans are due in full on payday. This means a $300 advance with $30 in fees per $100 today will make your paycheck $390 lighter come payday. This is a lot of money so make sure you can manage your expenses to be able to pay off the entire loan at payday.
State licensed lenders are generally safer.
Not all lenders are the same. Many online lenders are largely unregulated operating outside of the US. This includes offshore lenders and tribal lenders. This makes it very difficult if things go wrong. Remember you have given the lender access to your checking account. State licensed lenders are regulated lenders. These lenders are licensed by states and must follow regulations regarding collections and loan renewals or risk losing their license.
An installment loan may reduce costs.
Payday lenders may offer a renewals but remember you will be paying fees on fees. A $300 loan with $30 in fees per $100 will make your paycheck $390 lighter at your next payday but if you roll it over one payday it will cost you $507 on the second payday. This means $300 borrowed is now costing $207 in fees after two paydays. The difference between installment loans and payday loans is that repayment is spread out over a longer period of time. These loans are still expensive and rarely make economic sense so only take one if it's necessary.
Short term loans can help in a bind. They don't require good credit and get cash into your checking account over night but these loans, whether it's an installment loan or a payday loan, are expensive. It's always better to wait until payday instead of taking out a loan if one can wait.
If it's an emergency and cash is needed then we prefer to go with a state licensed lender. If you can pay your loan back in full at the next payday a payday loan may be a good option. If you cannot pay it in full then an installment loan may be a better option. See payday or installment loans for additional information.
Doshound wishes you and your families a most wonderful New Year.
This year brought many changes to the payday lending landscape. In our opinion, the biggest impact was made by the NY Attorney General. Their cease and desist letter to payday lenders making loans in NY brought a lot of press but we believe real change was made by the request to ACH processors to stop working with bad lenders. Many of these bad lenders took advantage of people already in a tough spot. For example, when full payment could not be made a lender would break down ACH withdrawals into numerous small amounts and hit a person's account multiple times a day resulting in numerous fees to the consumer both from the bank and the payday lender. By working with ACH processors the attorney general helped target bad payday lender's payment infrastructure. Doshound estimates roughly 30%-50% of payday lenders stopped their marketing and many lenders shut down entirely. It's important to note that almost 100% of these lenders were either off-shore or tribal lenders. State licensed lenders continue to operate. We think this cleanup process is great for the industry overall.
We have also seen the beginning of a shift away from one-time payday loans to longer-term installment loans. This has occurred as regulators continue to scrutinize payday lending. We have seen new players enter the installment lending space as state-licensed lenders. We are encouraged by this and believe additional options are good for customers and hope the additional competition will bring lower pricing for borrowers.
In 2014 we look forward to continued improvements. We hope there will be increased transparency, improved regulations, and clearer guidelines. Clear, robust rules encourage legitimate payday and installment lenders to compete on price and service. We hope new players will continue to enter the space and that they will bring innovative products and services. Ideas such as finding other measures of credit risk or propensity to pay such as social networks, lenders working with employers to create small emergency advances, or lenders finding other sources of collateral such as retail loyalty points all sound promising to us. We look forward to 2014 and all that it brings.
We hope the new year brings you lots of love, peace, and joy.
Great Plains Lending and Plain Green Loans have stopped marketing new loans pending the outcome of a court case in which the NY Attorney General sued another payday lender for offering loans in the State of New York. Both these lenders are operated by Think Finance as tribal entities under the premise that they can export their tribal laws into states. The New York regulator's position is that it has the authority to regulate tribal lenders doing business in New York. They sent cease-and-desist orders to many online payday lenders offering loans New York.
Both Great Plains Lending and Plain Green Loans stopped marketing in the middle of August 2013 and very briefly re-started marketing on Oct 1, 2013 but quickly stopped again after The U.S. District Court for the Southern District of New York ruled in favor of New York. It ruled that the state can regulate lenders making loans to New York state residents even when loans are originated from offices on tribal land.
The American Banker reports on this as well: NY Can Regulate Lenders with Tribal Ties.
Since reporting on this change at the end of 2013 we have not seen a change in marketing from either Great Plains Lending or Plain Green Loans. There has been a notable industry-wide shift away from the tribal lending model. Or, to be more specific, we have seen tribal lenders taking a more stealth mode to marketing while new entrants have entered the space but are pursuing the state license path. It appears Think Finance, the main operators of Great Plains and Plain Green, is taking the same approach. They continue to invest online marketing dollars into, Rise Credit, their other short-term loan business, while stopping with the other two. We do not anticipate a change in this approach in the near future.
In general, The Payday Hound prefers state-licensed lenders as they generally have additional oversight from state regulators.
Thus, if you need an installment loan you might consider Rise Credit, Net Credit, Avant. These are all more recent entrants into the short-term lending space and are all state licensed. Also see Installment Lenders for additional state-licensed lenders.
DiscountAdvances, MyCashNow, and PaydayMax have stopped accepting new applications. We called the number on their site and were told that they have stopped accepting new applicants because of legal reasons and are working to remedy the situation. They could not give us a date for when they would begin accepting new loans.
We are guessing this decision to stop funding loans is related to the NY Attorney General’s decision to sue another payday lender for offering loans in the State of New York. Here is the NY Attorney General’s press realease.
Many payday lenders operate under tribal law and the belief that they are able to export their tribal laws into other states. DiscountAdvances, MyCashNow, and PaydayMax took it a step further and operated as offshore entities operating under the belief they could export their offshore laws into the US. Many of these tribal lenders and offshore lenders have either stopped accepting new loans or have scaled back on marketing to see the outcome of this lawsuit.
The Payday Hound believes that although this lawsuit is disruptive in the short term it will benefit the industry in the long term as the outcome will help to clarify the laws around payday lending. The Payday Hound believes clear, consistent, and enforceable regulations in the short-term, lending space will help protect you and provide you more choice. See Are Payday Loan Users Stupid for more information regarding our position on regulations in the payday lending space.
In the mean time, the best way to protect yourself is to educate yourself. The Payday Hounds believe the best choice for payday loans are state-licensed lenders. You can review this list of payday lenders to find a state licensed lender.
We recently received a payday loan email ad with the subject "Get approved for summer vacation cash in as little as an hour!" We cannot think of a better example of how some payday loan companies are being irresponsible with respect to their users. Payday loans are an expensive form of borrowing. They should only be offered, if at all, to consumers when they have no other options. Payday loans, and really any loan, should not be used for vacation cash.
As a consumer you can protect yourself from unscrupulous offers. Only use a payday loan when you have no other cheaper option and you really need the cash. When considering different options consider two areas: 1) where to get cash and 2) why the cash is needed. In the first case, other options include borrowing from friends and family but if you are considering a payday loan there are most likely no other sources of cash so thinking of options here is not very useful. A better solution is to consider the second area -- why is the cash needed? Consider if you really need the cash right now. For example, can the expense wait? Can you save up for the purchase? Can you take a second job to help save up? It is much better to save up for your purchase than to buy the item now with a payday loan. Payday loans are expensive and you end up paying much more for the item than it is worth. In addition to overpaying you put yourself at risk of getting into deep debt, putting at risk a lot more than the cost of waiting to buy something. Situations where it might make sense to use a payday loan are when the expense cannot be avoided. For example, to cover an unexpected medical expense or to keep the power on in the winter.
A good way to double check if you are using payday loans correctly is to see how often you are taking out a payday loan. Since emergencies by definition should not happen very often payday loan borrowing should not happen very often. This means appropriate usage is maybe, at most, 1-3 payday loans every 12 months. If you see that you are using a payday loan more than that you are most likely taking out too many payday loans. If you are misusing payday loans you are not alone. As the chart above shows, a recent study by the Consumer Finance Protection Board found that about 2/3 of payday loan users use a payday loan 7 or more times a year. That is a lot of people misusing payday loans!
Payday loan companies have done a good job making it very easy to get cash. This is an important service enhancement when needed in an emergency but this convenience should not be misrepresented or misused. Payday loans are not designed for quick, easy, fun cash. They are designed for emergencies. Protect yourself from lenders that are misrepresenting how to best to use a payday loan and make sure you only use them in emergencies.
Try a Staycation!
And as for that vacation? Sometimes staying at home can be just as fun and even less stressful -- especially if you don't have to worry about paying off a loan when you come back. Here are some great ideas for a staycation!