Cash advance industry claims that all is well in the land of 400% interest loans

The payday loan industry is touting the results of a recent survey to say that, by and large, their customers are happy with their experiences and that most would do it again. This may come as a shock to consumers who think that borrowing money at rates that often exceed 400% annually isn’t exactly a service, but then again, the industry itself is responsible for the survey. One would expect no less from such a study.

The payday lending industry makes its money offering short term loans that typically range from $100-500 with a duration of about two weeks. Fees charged for the loan range from $10-30 per $100 borrowed, and the sum, plus the fee, is due in two week’s time. If not paid back on that date, the customer can “roll over” the loan for another two weeks by paying the fee a second time.

Opponents of the payday loan stores say that the loans are predatory, the fees are outrageous, and the stores prey upon those who can least afford to pay the high fees. The stores tend to be located either in poor neighborhoods or near military bases, rather than in affluent neighborhoods. 

The industry disagrees. The Community Financial Services Association of America, an industry trade group, offers some differing information on its Web site:

The CFSA claims that the average customer earns between $25000-50,000 per year, that 42% own their own homes, that 56% of customers have “some college” and that two thirds of customers are under 45 years old. This, they say, proves that the customers are not the working poor, but are, in fact, the working middle class.

Then again 69% of all Americans own their own homes, and $25,000 in income is not generally regarded as a middle class income. $25,000 is certainly not a middle class salary for someone with a college education; even in Utah, where teachers are paid less than in any other state, the starting salary for a first year teacher is more than that.

In truth, it appears that the average customer is not well paid, not very old and is less likely to own their own home than society at large. That suggests to us that the typical customer is probably not from the middle class.

The CFSA suggests that their rates, which average 400% per year, are cheap compared to a charge for a bounced check at a bank, which, if viewed as an annual rate, can exceed 1000%. But the charge for a bounced check is a penalty, not a fee. It is imposed to encourage you not to do it again. The fees charged for a payday loan are fees, and as such are actual interest. This is sort of an apples and oranges comparison.

As expected, the industry claims that their customers are happy with their experiences. No doubt, some of them are. But suggesting that their average customers are middle class or that their products are cheaper than others offered elsewhere is a bit of a stretch. Borrowers are urged to use their best judgment before taking out a quick cash loan.

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