ORLANDO, Fla. – “Need money NOW?” “Instant cash!” “No credit check!”
Not too long ago, your average payday lender was a strip mall storefront wedged between businesses like a laundromat, a pizzeria, a discount store, or a pawn shop. It’s a generalization evoking an image of a place you’ve probably seen or even walked into yourself.
But no longer - like just about everything else, payday lenders have gone digital, with trips to a physical storefront replaced by the convenience of an app. Download, agree to the terms, select, click, and in some cases, you can have cash in hand in just a few minutes.
Despite advances in tech, when it comes to the fundamental risks of a payday loan, to borrow from Led Zeppelin, “the song remains the same.”
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Interest rates on payday loans are astronomical, and in the long run, borrowers are often better off steering clear. In fact, for too many borrowers, the new version of this old tune is set to repeat - only louder, harsher and more unforgiving.
While the storefronts may be gone, the business model hasn’t changed; it’s just found a new home on your smartphone.
According to Zion Market Research, the 2024 global payday loan market was worth about $5.37 billion and could grow to $7.23 billion by 2034 with younger borrowers (21-30) and single-income households relying the most on this finance option. Zion also expects significant growth in the online payday loan segment.
At its core, a payday loan is a short-term cash advance meant to tide borrowers over until their next paycheck. But these loans differ from a traditional bank or credit union loan in some key ways:
- No credit check: Payday loans typically skip credit reports, background checks, and extensive paperwork.
- Short repayment window: The terms (repayment period) are usually over a short amount of time (think days instead of weeks or years).
- Small amounts: Loans generally average about $300 to $500, though they can cap out at $1,500 in some states like Wisconsin.
- Quick turnaround: Approval and funding (cash in hand) is much quicker (minutes versus days through a traditional financial institution).
- High cost for convenience: The interest rate (and fees) is usually far higher than what you would get from a bank or credit union.
According to the Center for Financial Responsibility, in 2022, Americans took out more than 20 million payday loans totaling more than $8.6 billion.
Twelve states plus the District of Columbia ban payday loans altogether: Arizona, Colorado, D.C., Hawaii, Illinois, Maryland, Minnesota, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, and South Dakota.
The CFPB also says that a staggering number, four out of five (80%) of all payday loans don’t get paid back in a two-week window.
The result: borrowers move into what is known as a rollover option, which significantly increases fees and interest on original loans.
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There is some good news here for Floridians: rollovers are not allowed under state law. Translation: Instead of borrowers getting trapped in a hamster wheel of paying mostly interest without reducing principal, the state steps in and mandates specific borrower and lender obligations.
- In Florida, payday lenders are also known as Deferred Presentment Providers.
- Floridians can only have one payday loan at a time (no doubling or tripling up on loans for extra cash).
- Loans are capped at $500.
- If a payday loan is not repaid on time, state law sets a 60-day grace period for the borrower to regroup and set up payoff of the loan.
- During the 60-day period, the borrower MUST participate in credit counseling and come up with a repayment plan.
- Borrower must initiate credit counseling within 7 days of missing loan’s due date.
- No additional fees or penalties will be levied against the borrower during the 60-day period.
- The lender cannot sue or garnish wages from the borrower during the 60-day period.
So, it’s one thing to talk about a payday loan, and quite another to lay it all out for you. Since I’m using famous quotes today, let’s go with one from the movie Jerry Maguire: “Show me the money!”
To illustrate, let’s walk through an example of borrowing $500 from a payday lender.
- In Florida, you’ll have to pay a $5 verification fee.
- Florida also allows a fee of up to 10% of what you borrow on a payday loan (functionally the same as interest). Since $500 is the max you can borrow per pay period (also mandated by law), you’re on the hook for $50.
- Add the $5 fee, the $50 interest, and the original $500 and your $500 loan will cost you $555.
- If (IF!) you pay back the loan with all the fees and interest in a designated two-week period, you’ll be paying back $555. That breaks down to an 11% premium to borrow and repay the money within 14 days.
- Eleven percent isn’t so bad, again, as long as you repay ALL the money in the designated time period (two weeks). That 11% over two weeks translates to roughly 391% over a year (isn’t it amazing how a small, short-term number can hide sky-high long-term costs?).
It’s the kind of math that makes “fast cash” anything but cheap.
Now let’s say you borrow that same amount ($500) from a bank that typically allows repayment over months (or years) with a fixed installment:
- The bank interest rate might be about 7% APR, far more favorable repayment terms typically spread over months, decreasing payment burdens.
- In total, you would pay back $535.
- What does that 12-month repayment look like: right around $45 per month.
Not much of a difference, right? It’s only $20, but in some cases, that $20 is just the start of costs that can spiral out of control. Why? Did you notice those three little initials APR? Let’s explain, and you’ll see how this all comes together.
APR stands for Annual Percentage Rate, the yearly cost of borrowing money. This is an area where Floridians are protected by the state because, on a payday loan, we don’t have the option of taking a year to repay. If we did, that previously mentioned 11% is actually more like 391% (the average APR on a payday loan)!
Because payday loans are typically repaid in two weeks, the standard fee translates into a very high annualized APR. If you stretched repayment over a year at a 391% APR, the total cost could balloon to approximately $1,160, more than double the original amount borrowed.
So, what’s the bottom line? Payday loans have their advantages and disadvantages:
Advantages:
- Fast access and convenience.
- No credit check is needed.
- Consumer protection under Florida law if unable to repay on time.
Disadvantages:
- High borrowing costs.
- Loan terms often require authorization for lenders to withdraw payments directly from a borrower’s bank account, sometimes triggering overdraft fees.
- Short loan terms and ease of access promote repeat borrowing.
Finally, when it comes to short-term, small-dollar loans, all is not lost.
According to the Pew Charitable Trusts, many banks are starting to roll out safe, affordable, small-dollar loans with much lower APRs. Some of the key benefits include loans costing up to 15 times less than ones from payday lenders, a fast and automated application process, and longer repayment terms.
In addition, banks rolling out these types of loans are increasingly underwriting them based on a customer’s recent account and cash flow rather than solely on credit scores. Banks rolling out these types of loans include Bank of America’s Balance Assist loan, Wells-Fargo’s Flex Loan, Regions Bank’s Protection Line of Credit, and US Bank’s Simple Loan.
The instruments may have changed, but the tune remains familiar - quick cash today often means heavy debt tomorrow. Sometimes, silence is the better song.
Payday loans may have gone digital, but the trap is timeless. Technology changed the delivery, not the danger, and for borrowers chasing quick relief, the cost of convenience can hit a painful high note.
The tune has changed from storefronts to screens, yet the rhythm of risk hasn’t missed a beat.