| "What is wrong with lenders who think they need | | | | salaries, advertising, and cover bad loan costs with |
| to charge more than 36% APR? If they can't | | | | the fees they charge their borrowers. |
| make money at 36% APR then they should be | | | | A report issued by the accredited accounting firm, |
| out of business," quips the well-intentioned blogger | | | | Ernst & Young in Canada, revealed that it costs a |
| who reads about cash advance lenders who state | | | | lender $15 dollars to lend $100 to a new |
| time and time again that a 36% annual | | | | customer. Regardless of the efforts of lenders, |
| percentage rate loan would force the lender to | | | | they cannot reduce these fixed expenses. |
| close its doors. | | | | Furthermore, a short-term lender needs to |
| This claim and others from community members | | | | recoup these expenses within two weeks. For |
| are well-intentioned, but an honest look at the | | | | other loan products, such as cars and real |
| numbers reveals what it costs to provide such | | | | property, these costs can be spread out and |
| credit. A closer look at the issue is warranted and | | | | recovered over months and years, resulting in a |
| will reveal what APR consumers are really paying | | | | lower APR. |
| for short-term loans and other similar financial | | | | Why a 36% APR Won't Work for Short-Term |
| products. | | | | Loans |
| Payday Advances Began as a Fee Based Business | | | | A 36% APR on a $100 dollar, two week loan, |
| More than a couple of decades ago lenders were | | | | would provide the lender a fee of $1.38. As the |
| required to explain to the borrower that they | | | | above mentioned paragraph stated, the average |
| would pay a fee of 10% of the amount | | | | costs of providing a loan can exceed $15.00 per |
| borrowed to receive a few hundred dollars for a | | | | $100. This shows that lenders cannot issue |
| couple weeks. Over time, Congress stipulated that | | | | short-term credit at a low APR. |
| the annual percentage rate needed to be provided | | | | This issue is not unique to cash advance loans. |
| to borrowers to help them measure the cost of | | | | Overdraft protection charges often have an APR |
| credit. Short-term loans such as payday loans | | | | of 800%, credit card late fees can exceed |
| were included in this federally mandated program | | | | 1000% APR and a simple ATM access fee of |
| even though the outstanding loan never accrued | | | | $1.50 to get $40 dollars can exceed 1200% APR! |
| interest for a full year. | | | | It becomes easier to see why many consumers |
| Consumers who were used to paying 8 to 15% | | | | choose to utilize cash advance loans when facing |
| of the face amount of a loan were now told that | | | | a short-term credit need. |
| the money they were borrowing was costing | | | | Conclusion |
| them 391% APR or even greater. Why such a | | | | Although the notion of a low APR short-term |
| high APR when the business model stayed | | | | credit product is appealing, it cannot be viably |
| exactly the same? For the simple fact that cash | | | | offered to the public. In October of 2007, |
| advance loans are intended and often limited to | | | | Congress limited credit provided to members of |
| terms of less than 30 days. When combining the | | | | the military to 36% APR. The idea was noble, but |
| average loan fee of $10 for a $100 loan with a | | | | instead of lenders issuing short-term loans at 36% |
| short term of two weeks, lenders are often | | | | APR, they simply refused to lend to members of |
| required to display triple digital interest rates. | | | | the military. Many soldiers and sailors were left |
| "Why Don't Lenders Only Charge 36% APR on | | | | without viable and reasonable short-term credit |
| Two Week Loans"? | | | | options. |
| This is a fair question. If lenders could remain | | | | Many members of the armed services were |
| profitable and offer loans at this APR they would. | | | | forced to utilize other, more expensive credit |
| The competition surrounding cash advance lending | | | | products such as bounced check fees, overdraft |
| is fierce and many lenders strive to deliver their | | | | protection plans, and late fees. These fees can |
| product at the lowest cost possible to the | | | | end up costing consumers hundreds or thousands |
| borrower. One issue that all short-term lenders | | | | more than a well-regulated payday advance loan. |
| face is fixed costs. Fixed costs are generally the | | | | Now I ask you again, "Does it make sense to cap |
| same, regardless of the lender, loan amount, or | | | | the industry at 36% APR, or is there a better |
| loan product. Every lender from a payday loan | | | | solution"? |
| provider to a credit union has to pay rent, utilities, | | | | |