There's no question that payday loans have been a controversial financial subject during the past few decades. The widespread increase in payday lending and check cashing services in many communities, often due to a lack of access to traditional banking options, has brought along with it many confusing, negative portrayals of the industry. And with the high volume of conflicting information available, particularly online, separating fact from fiction can be a difficult challenge. As someone interested in finding out more about the payday loan industry, how do you determine what to believe? To get started, consider the following two common myths about the payday loan industry and the reality behind them.Myth: Payday loans exploit borrowers with inflated interest rates.Payday loans can reach 300% APR or more, depending on how much is initially borrowed and when the borrower repays the payday loan. These high interest rates are often the primary argument against the < a href ="http://www.checkngo.com/resources/faq/payday-loans/general/payday-loan-myths.aspx/?AfsCampaignID=637">payday advance lending industry and, when viewed out of context, these numbers can be shocking.Reality: APR works for long-term, not short-term loans.The Truth in Lending Act (TILA), a federal law passed in 1968, requires that all terms, conditions and charges incurred during a credit transaction in the United States be fully disclosed to the consumer. According to this law, interest rates must be expressed in terms of Annual Percentage Rate (APR). Because a payday loan is a transaction governed by the TILA, all payday loan providers must express their interest rates in terms of APR.Since APR is an expression of an annual rate, it only accurately reflects loans with a repayment period of a year or more. However, the repayment period for payday loans typically lasts two weeks. Applying the formula for determining APR to a payday loan works from the assumption that the borrower would continue repaying the loan over the course of a year at that rate. This isn't an accurate representation of the nature of payday loan process. A payday loan is a short-term loan, with fees and rates stated from the initiation of the loan. While some borrowers may choose to extend repayment, or roll over their payday loans, this option isn't available in many states and is typically very limited in states that do allow that option. But, assuming that a payday loan could be rolled over for a year, other options available to most consumers don't look much better. Consider the APR of the following examples,* as compared to payday loans: $100 payday advance with a $15 fee = 391% APR $100 bounced check with $54 NSF/merchant fees = 1,409% APR $100 credit card balance with a $37 late fee = 965% APR $100 utility bill with $46 late/reconnect fees = 1,203% APR.*Source: http://www.cfsa.net/myth_vs_reality.htmlWhen presented side by side, these more traditionally acceptable options may seem much less acceptable.Myth: Payday loans lure consumers into a "cycle of debt". A borrower should repay payday loans within two weeks. If unable to repay the full amount agreed upon in the loan contract, sometimes a borrower can roll over the payday loan for another period. If the borrower is unable to repay the loan's full amount on the following new due date, the roll over process continues, rapidly increasing the borrower's debt load until it reaches an unmanageable amount. Reality: Most states heavily restrict the practice of rolling over payday loans.Depending on the borrower's state of residence, rolling over a payday loan may not be an option. In states that do allow borrowers to roll over their loans, the number of rollovers allowed is typically heavily restricted. In those states that still allow for payday loan customers to roll over their loans, it's important for potential payday loan borrowers to only borrow from the most reputable payday lenders. As in any industry, there are a few less than ethical practitioners. Before borrowing, consumers should always research the practices of their potential payday loan provider. Payday loan providers who are members of the Community Financial Services Association of America (CFSA), a payday loan industry advocate for responsible lending practices, follow strict guidelines for roll over loans. Consumers of CFSA lenders are restricted to four rollovers, or the state regulated limit, whichever is less. For CFSA payday lenders, even in states that allow unlimited payday loan rollovers, the maximum amount of time allowed for a loan to be outstanding is eight weeks. Of course, part of borrowing responsibly lies in the hands of those that choose to borrow. Potential payday loan borrowers should always carefully look at their budgets to make sure that funds will be available once their repayment is due; this guarantees that no additional interest fees or interest will ever be accrued.For more about the reality behind common payday loan myths, visit < a href="http://www.checkngo.com/resources/faq/payday-loans/default.aspx/?AfsCampaignID=637">Check 'n Go's FAQ section. As a payday loan industry leader and founding member of the CFSA, Check 'n Go is committed to increasing consumer awareness and promoting high ethical standards within in the payday loan industry.
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