Georgia Voices: Payday loans sinkholes for wallets
by The Savannah Morning News
April 13, 2014 12:00 AM | 2422 views | 1 1 comments | 15 15 recommendations | email to a friend | print
It’s now official. The payday loan business is a giant sinkhole for people’s wallets.

The Consumer Financial Protection Bureau, a federal watchdog group, reported last week that about half of all payday loans are made to people who extend the loans so many times they end up paying more in fees than the original amount they borrowed.

The report showed that four of five payday loans are extended, or “rolled over,” within 14 days. Additional fees are charged when loans are rolled over.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” CFPB Director Richard Cordray said in a statement.

No kidding. Worse, it’s a trap that’s difficult to escape.

Payday loans, also known as cash advances or check loans, are short-term loans at high interest rates, usually for $500 or less. They often are made to borrowers with weak credit or low incomes, and the storefront businesses often are located near military bases. The equivalent annual interest rates run to three digits.

The loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee. In two weeks, the lender cashes your check or charges you more interest to extend, or “roll over,” the loan for another two weeks.

Payday loans are generally illegal in Georgia, according to the Governor’s Office of Consumer Affairs.

What’s especially shocking in the CFPB report were some of the numbers.

The bureau based its report on data from about 12 million payday loans in 30 states in 2011 and 2012. It found that only 15 percent of borrowers repay all their payday debts on time without re-borrowing within 14 days, and 64 percent renew at least one loan one or more times.

Meanwhile, 22 percent of payday loans are extended by borrowers six times or more; 15 percent are extended at least 10 times.

The industry argues that payday loans provide a useful service to help people manage unexpected and temporary financial difficulties.

Maybe that’s how it works 15 percent of the time. But for the remaining 85 percent, it looks like this industry is grabbing someone’s billfold and not letting go.

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A F Bob Blair Jr
April 13, 2014
The current method of calculating an Annual Percentage Rate in the Truth in Lending Act (TILA) of 1968 (unchanged to date) is the mathematically-untrue, Nominal, Simple-Interest, method stated in Appendix J(b)(1) as the Nominal Annual Percentage Rate, the rate for a unit-period multiplied by the number of unit-periods in a year. I will give that the acronym SIAPR instead of the current APR. Black’s Law Dictionary, Webster’s Dictionary, and other dictionaries state the definition of “Nominal” as “not real or actual.” That should give the reader a clue that the SIAPR method it is not true. The mathematically-true method is the rate for a payment period compounded for the number of payment periods in a year. I will assign that method the acronym CAPR. That was called the Effective APR. Modern usage (or misusage) of the word “Effective” may mean simple-interest including certain fees and not compounded … so that name’s corruption should be avoided. Some calculations avoid including certain fee … stating they are not interest. That is flawed logic … they should be included. A classic example of the difference in methods would be a payday loan for a borrower giving a 14 day post-dated check for $115 to receive $100. The SIAPR is 391.07%, calculated as (using Excel mathematical characters) 15%*365/14. The mathematically-true CAPR is 3,723.66%, calculated as (((15/100) 1)^(365/14)-1)*100. TILA allows a tolerance of accuracy of one eighth of one percent. The CAPR is not merely close to that tolerance, it is 26,660 tolerances from the SIAPR, calculated as ( 3723.66%-391.07%)/0.125%. The Truth in Lending Act should be changed to use the mathematically-true CAPR.
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