Most of the people have a wrong notion or myth about short-term loans (read: payday loans) that is a brainchild of widespread negative press as well as misleading information. However, here are some fundamental facts about payday loans as corroborated by reliable sources.
Myth 1: Payday loans come with a 390% APR.
Truth: Actually, payday loans have a maturity period of two weeks and so, they are not annual loans. As a result, they do not carry a 390% annual percentage rate (APR) or anything similar on them, as quoted by their critics.
In general, these payday loans have a fee of $15 for every $100 borrowed or a 15% rate for a loan with repayment period of two weeks. However, the 390% APR will only be possible, if you roll over your payday loans with a two-week repayment deadline by more than 26 times.
This translates into one full year and hence, technically will then arrive at the APR of 390%, something that is pretty impossible to happen. Here, the Community Financial Services Association (CFSA) Best Practices puts a cap on the number of times a payday loan can be rolled over and that is a maximum of four times or as set by the concerned state, whichever is less.
Myth 2: Payday loans can be an affordable source of instant cash.
Truth: For a lot of people like you, payday loans can be a great way to get instant cash to meet any kind of sudden, short-term need and cost-effective too, when compared to various other sources of funds.
However, as per the government's market study, the average APR on any typical two-week checking overdraft is said to be somewhere at 1,067%, i.e. well over double the rate on a traditional payday loan.
Myth 3: Payday loans are easy-to-understand line of credit.
Truth: According to a 2008 government survey (FDIC Study of Bank Overdraft Programs), it has been found that a good percentage of the financial institutions deliberately increase the frequency of consumer overdrafts. This refers to the display of account balances on ATM screens that are shown only after an overdraft has occurred. Moreover, they increase the number of insufficient fund checks cleared by them ahead of the small ones.
In addition, these financial institutions sign-up customer for overdraft protection automatically without sending them any sort of alert or notification. Comparing such unscrupulous overdraft practices, payday lenders run their businesses with greater transparency since they are liable to originate loans that clearly specify all the fees and the APRs associated with them.
Myth 4: Consumers are crestfallen after banning payday loans.
Truth: In a study it was revealed that post the outlawing of payday loans in Georgia in the year 2004, there was a sudden spike in the number of checks that bounced in the state. Moreover, people in that state filed increasingly more complaints with the Federal Trade Commission (FTC) against the lenders and debt collectors.
These people were more likely to seek payday loan consolidation or even file bankruptcy to relieve themselves from the never-ending cycle of payday debt.