Most states have usury laws that prohibit the lending of money and charging above a certain interest rate. But they have so many loopholes that a not too bright first-year law student who received a “D” in debtor-creditor rights can drive a truck through them. And so the bottom feeders and trash of the American business world have come up with creative and ingenious ways of charging poor and working-class people exorbitant rates of interest without calling their charges interest. One of these methods is payday loans, which in the rest of the advanced industrial world are either illegal or severely restricted and regulated.
The payday loan is an advance against a persons next paycheck. Say it is Monday and a person’s car breaks down. S/he needs the car to get to work and the cost of the repair is $300. S/he has no cash or credit so she goes to a payday loan business. The payday loan business advances $300 and in return receives a post-dated check or a draw on the persons’ bank account. On Friday, when our hypothetical payday loan customer is paid, the payday loan company is repaid either by cashing the postdated check or drawing on the borrower’s checking account. This all sounds like a legitimate business until you realize that the interest rate charged by the payday lender is between 400% and 800%. It is not called interest but rather fees, surcharges, and other assorted nonsense terms. These rates of interest would make a Mafia loan shark blush.
The people who run this garbage business refer to their customers as “under serviced” by the banks; of course, they are happy to service the underserviced. The default rate on payday loans is around 20%, meaning that one in five people who borrow this way do not repay the loan. But does this matter if you are charging between 400% and 800% interest?