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The State of North Carolina Seeks to Regulate Payday Loans

Currently, the state of North Carolina has an effective APR (Annual Percentage Rate) of 521% for a payday loan amount of $250.

This and other reasons have North Carolina legislators considering passing regulatory legislation on payday loan companies in 2010. Proponents of this suggest:

Once people enter this debt cycle, they often stay in it
An estimated $80 million in excess fees is paid out by borrowers. This is money that could otherwise be supporting North Carolina’s economy.
In most cases the money goes to firm headquarters outside the state
Legislative Efforts

In 2020 Mark Leeper, attempted to introduce legislation that would have limited the worst abuses. However, he wasn’t able to introduce the legislation.

Representative Leeper said he is considering making another run at it this year. He indicated that he’s working with some local consumer advocate groups to put together some legislation but is still uncertain whether or not he’ll proceed.

“I am up against a very strong lobbying core and they have a lot of money and a lot of influence down here. They have the ability to take any bill that is moving forward and shape it to their own interests and really stop any real reform. I want to make sure I have my ducks in a row before I go ahead on this,” said Leeper.

Other groups are working on legislation to impose a 36 percent rate cap on payday loans.

Another approach is to try and take it to the people to vote on the legislation as a referendum. This would avoid lobbyist pressures. Plus, the polls on it are favorable and strongly supported by Democrats and Republicans

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Who Uses Payday Loans?

If you listen to consumer advocates, you’d think that the only people who ever use payday loans are the working poor. These poor souls walk into a payday lender, not knowing that they are like a sheep marching into a wolf’s den. Some politicians have even made their careers defending the “victims” of payday lending.

The fact of the matter is, however, it’s not just low income people who use payday loans. The average borrower of a payday loan actually earns between $25,000 and $50,000 per year. They are at the lower end of the income scale, to be sure, but they’re usually not the poorest people around.

In fact, payday lenders usually require that the borrowers have a job. They have to provide paycheck stubs in order to get the loan in the first place.

Credit Rating and Score Matter

One of the reasons that people often seek out payday loans is because they can’t get short-term credit elsewhere. In many cases, it’s because their credit score isn’t very good. A payday lender doesn’t check credit ratings or credit scores before they make their loan, making a payday loan an attractive option for folks with less than stellar credit.

So Does Age and Ethnicity

According to one recent study, the average payday loan borrower is relatively young. They also tend to be African-American. Because of this, some opponents of payday loans have actually suggested that the businesses are inherently racist, and they purposely prey on African-Americans. To date, these claims seem to be more about hype than about the facts.

And So Does Military Service

Studies have also shown that military personnel seem particularly apt to use payday loan services, too. In fact, many payday loan businesses have set up near military bases in order to reach that demographic.

This led to legislation that capped the interest rate that a lender can charge military personnel. That cap has been controversial, as opponents argue that military personnel ought to have the same access to lenders that civilians have.

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The Payday Shuffle

It’s no fun trying to “make it ‘till payday.” The unfortuate but all-too-real fact of the matter is that most folks in this country live paycheck to paycheck. There isn’t any room in their budget for error, and there isn’t any leeway for things like unexpected expenses. One relatively minor even – like a $200 car repair or a missed ATM withdrawl from your checkbook register – and you can be facing a series of bounced checks and the fees that accompany them.

So, you start the Payday shuffle. You write a check from one account to another to cover checks that are going to bounce. At one time, that would have bought you two or three days. In many cases, that was enough to get to your next payday, deposit your paycheck, and cover the bad check.

Another move in the payday shuffle was to go to a store, usually a grocery store, that would allow you to cash a check. You could cash the check and then you’d have a few days until it cleared. This would let you buy groceries, or get some cash to tide you over.

Today, however, with elctronic funds transfers and the way banks are so rapidly connected, these tactics just don’t work. The payday shuffle is quickly becoming a thing of the past.

To be sure, it’s probably a good thing that times have changed. After all, knowingly writing a bad check is technically a felony. While you’re not likely to be prosecuted for doing it once, and while it’s hard to prove in court, it’s still wrong. It’s also potentially expensive, because if checks start to clear before payday you’re truly screwed as all of the fees eat up your paycheck.

Payday loans are one recent solution to this connundrum. You can take out a payday loan today and write a check for the amount you’re borrowing (plus a fee, of course). The payday lender holds the check until your paycheck clears. That way, you avoid writing bad checks intentionally, you save the cost of bounced check fees and you save the embarassment of a business calling you up to ask when you’re going to cover your bad check. There are even payday lenders online that you can borrow from.

To be sure, the interest rate is significant on payday loans. The good news is that the short term of the loans keeps the fees to a manageable amount. While it’s not an ideal solution, using a payday loan is usually a better option than trying to do the payday shuffle.

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Just How Expensive is a Payday Loan?

Payday loans are cheap, right? Of course they are. It’s only $15 or $20 to borrow $100. That’s not so bad, is it? After all, if you were to bounce a check for $100, you’d have to pay $35 to your bank and another $35 to the place where you bounced the check. That’s $70 in fees, just for one bounced check.

It may not sound like a lot, but put it into perspective. The average payday loan is a two week loan. If the fee is $25, you write a check to the payday loan company for $125 and they give you $100. Two weeks later, they cash the check and the deal is done.

What’s the rate on this kind of loan? More than credit cards, sure, but how much more?

Try 20 times more expensive. The APR on the above loan would be over 650 percent. That’s compared to the worst credit card rates of around 30 percent.

True, you pay off a payday loan quicker than you pay off a credit card. At least, in theory, that’s how it works. If you take a year to pay off your $100 credit card, you could actually pay more than that $25 fee. That makes the payday loan a better deal, right?

Wrong again. You see, it sounds good, on paper (well, on your computer screen anyways). But the fact of the matter is that most payday loans are renewed – at least once. If you renew that payday loan just one time – effectively taking four weeks rather than two to pay it off – you’re paying $50 – well over any credit card interest rate.

To be sure, the waters can get a little bit muddied depending on your actual situation. If you borrow $100 to cover a check, you’re going to save $70 or so in fees from the bank as well as the company you wrote the check to. As long as you can pay off the payday loan in two cycles, you’re going to pay less than that over time. In some cases, a payday loan is the lesser of two evils.

The trick is to not get stuck in the repeat borrowing cycle. Take a payday loan if you need it, but then cowboy up and pay it off when it’s due, without taking out another one. Yes, it might mean Mac and Cheese for dinner all week, but it also means steak the following week.

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Government Tells Grown-Ups What to Do

One of the recurring themes coming out of Washington seems to be the effort by politicians to protect adults from themselves. Rather than treat adults like adults, they are intent on finding problems to fix even where they don’t exist.

Take, for example, the issue of payday loans. Back in 2019, the government decided that it should step in and prevent what it perceived to be an abuse of the nation’s servicemen and women. They passed a law that forbid any lender in the United States from charging more than 36 percent interest on a debt to a person in the military or their family.

Ostensibly, this law was designed to protect soldiers from payday lenders.

Some states have also passed laws that create a similar situation for all of the citizens in their state. Oregon, for example, has a 36 percent cap on interest rates. Groups like the Service Employees International Union have lobbied for these laws, claiming that the practices of payday lenders are predatory.

Proponents of these laws point out that banks and credit unions make plenty of money lending money for rates far below those of payday lenders. The problem comes with the term of the loan. While a bank loan is typically going to last a year or more, a payday loan usually lasts about two weeks.

This means that, even if the rate were capped at 90 percent, a payday lender would be able to only charge about 10 cents a day per $100 of the loan. That works out to $1.40 over a two week period. As the average payday loan is less than $300, this would make it completely unprofitable to try to run a business.

The problem with these laws is that they effectively protect only a small minority. Most people who walk into a payday lender understand that the interest rates are high, but they’re willing to pay them because of the extremely short term of the loan. To be able to borrow $100 at a fee of $15 in order to be sure that you don’t bounce a check and pay as much as $35 to your bank and another $35 to the recipient of the check makes good sense. Unfortunately, these laws block soldiers all across the country and citizens of many states from having that option.