Short term loans necessary, but are cash advance loans the answer?

A recent report by the National Association of Community Credit Unions outlines a need for short term, small denomination loans. While some credit unions offer such loans, which typically range from $100-500, most leave such lending to stores that offer payday loans or cash advance loans, as they are sometimes called. These loans, which are offered for periods of two weeks, carry fees that range from $10-30 per $100 borrowed, which can translate to interest rates that can approach 1000% per year.

The quick cash industry defends these products, saying that their customers are aware of the charges and that their products can actually save their customers money when they are short. The report by the NACCU would seem to agree, as it pointed out that a typical payday loan of $100 with a $15 charge carries an interest rate of 391% annually. On the other hand, if the same customer bounced a check for $100, their bank or credit union might charge them a fee ranging from $35-50, a much higher rate when calculated on an annual basis. The report also made similar comparisons to credit card late fees or a late utility bill that required a late fee and a reconnect fee.

While it is true that, taken on an annual basis, these fees are higher than those charged for payday loans, the comparisons are really between apples and oranges. The fee charged for a payday loan is rightly calculated as interest, which is defined as a fee charged in exchange for the lending of money for a specific amount of time. A late fee on a credit card or a bounced check fee, on the other hand, are not interest. They are penalties, assessed for failing to follow the rules that the consumers agreed to follow. Writing a check with insufficient funds is not a loan, it is either a mistake or a crime. As such, the fee charged by the institution for doing so is not interest, and it is wrong to consider it as such. How odd that the NACCU would make those comparisons.

It is certainly true, however, that taking out a payday loan in order to avoid writing a bad check would save the consumer money, provided that he or she paid back the funds within the standard two week period. The problem with this scenario is that many people who take out such loans are not able to repay the funds on time, and that causes the fees to double. Such is not the case with a fee for an unpaid check or an disconnected power meter.

The report is certainly correct in noting that society has a definite need for short term, small denomination loans. Sometimes, we are just a bit short before payday and the ability to borrow a small sum until then would be helpful. It would be more helpful if financial institutions such as credit unions would offer such solutions themselves, rather than leaving their customers to seek out more expensive cash elsewhere.

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