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Payday advance centers and check cashing locations are popping up all over Ohio since the General Assembly first approved the practice of payday lending about a decade ago. In fact, there are now more of these businesses located in Ohio than there are McDonald's, Burger King, and Wendy's restaurants combined.
Payday lenders are available to people who get in a bind and run short of cash before their next paycheck is due. This may be an improvement on some prior practices, such as illegal loan sharking and hocking personal possessions. Although banned in some states, payday lenders are licensed and regulated in Ohio . For the unbanked, or for people who do not have any other options available to obtain a short-term loan, a payday loan can be a source of quick cash to meet immediate needs. Payday lenders point out that banks and other financial institutions have been reluctant to meet this need for short-term cash because of high administrative costs and the unattractive default rates on such loans, which has provided an opportunity to step in and fill the void. Rapid growth of payday lending sites has made them accessible and convenient in almost every community.
How do people get trapped in the payday lending debt cycle?
Running short on cash? Need to get your car repaired? Need to buy groceries for the kids? Behind on the mortgage? These reasons, among others, cause people to end up in payday advance centers. Payday lending can become a problem, however, when cash-strapped consumers are looking for a quick financial fix without a long-term perspective. The interest rates on payday loans are extremely high and when fees and penalties are added in, the “all-in” cost of payday loans can grow to an annual percentage rate of as much as 400%, especially if a loan is not quickly repaid.
If you take out one payday loan, and it leads to another and then another, you are not helping yourself out of a financial jam but digging a hole that gets deeper every week. People who are continually paying such high fees and charges are likely to wind up in bankruptcy or foreclosure, leading to damaged credit or even financial ruin. This is no slight problem: it is estimated that 91% of payday loans are made to people who receive five or more loans annually, and millions of Americans are caught up in the payday lending cycle each year. The result is billions of dollars of interest, fees, and penalties paid by borrowers. Some credit unions and banks are now trying to develop competitive products for micro-loans at lower interest rates, but those products are few and far between, and so far they also carry relatively high costs to consumers.
ALTERNATIVES AND TIPS
- Be sure you know the cost of the loan and that you can pay it off on time.
- Beware of lenders who offer quick cash through the Internet or classified ads. They might not be properly licensed to make loans in Ohio and the loan offer could be a scam.
- Verify that the lender is licensed by the State of Ohio at www.com.state.oh.us or call 866-278-0003.
- When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest annual percentage rate. Consider a small loan from your credit union, an advance on your next paycheck from your employer, or a personal loan from family or friends. A cash advance on a credit card might also be a possibility, but it should be checked carefully because it might carry a higher interest rate than other sources.
- Ask creditors for more time to pay bills. Find out what they charge for that service.
- Make a realistic budget and avoid unnecessary purchases.
- Build some savings — even small deposits can help — to avoid borrowing for emergencies or unexpected expenses that may arise.
- Find out about overdraft protection on your checking account. Make sure you understand the terms and fees associated with your plan.
- If you need help working out a debt-repayment plan with creditors or developing a budget, contact your local consumer credit counseling service.
- If you do use a payday loan, borrow only as much as you can afford to pay out of your next paycheck.
- Talk with your own financial institution before patronizing a payday lender.
- Check with a credit union or a bank to see if they offer an alternative to payday loans at a lower interest rate and associated fees and penalties.
Sources: Federal Trade Commission, Better Business Bureau, Ohio Department of Commerce, Summit County Office of Consumer Affairs .
For more information, visit our website www.ohiotreasurer.gov or call us at 1-800-228-1102. |
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