The True Cost of Payday Loans
Today I found myself in line at the grocery store behind a customer wanting to use Western Union. She told me how happy she was that she was able to scrape together $300 to wire to her son for Christmas. I was happy for her but the financial counselor in me wanted to put the rate she was paying into perspective for her.
For the privilege of this one-time transaction she paid $15 (5% of the $300). She didn’t bat an eye at the cost of the transaction. Apparently she was used to paying the high fee. Actually, she most likely was unaware that it even was a high fee. Because I teach personal money management, I’m all too aware of how expensive financial services are for people utilizing money services outside of mainstream financial institutions like banks, credit unions, and savings and loans.
Alternative financial establishments charge exorbitant amounts for services.
I decided to dig deeper so upon returning to my office I learned from their website that Western Union’s direct fee for a $250-$500 money transfer is $12. That means the grocer also took a cut from the $300 transfer. For this transaction, Western Union made 4% or $12. The grocery store’s cut on the single transaction was 1% or $3. Alternative financial establishments charge exorbitant amounts for services that main stream financial institutions provide at no or very low costs.
More curious than ever, I drove to the local we’re not-quite-a-bank establishment to compare their rates with those of the friendly grocer. Fact: Predatory lenders are located in disadvantaged neighborhoods.
Upon arrival I wondered aloud why they were so busy. I was informed that they were actually understaffed due to flu season and that they are a 24-hour operation and have a least three customer service representatives on duty at all times.
I inquired about the cost to wire $300 to a zip code in an adjacent state. Answer: A whopping $27! A fee of 9% of the $300 and almost twice as much as the grocer’s. And what if I wanted to borrow the $300 I wanted to send from this we’re not-quite-a-bank establishment? The representative said he couldn’t tell me until I filled out an application. I thanked him and headed for the exit.
Predatory lenders ‘bank’ on the desperate and vulnerable.
There behind the door, tucked almost completely out of view was a fee schedule. It was very complicated even for this financial counselor to understand, so I snapped a photo and left. I didn’t have to wonder why he wouldn’t answer my question. Price list not in full view, my guess is that most customers fill out the application BEFORE they even know how much it will cost. Predatory lenders ‘bank’ on desperate and vulnerable customers not inquiring because, generally speaking, the customers they target are in dire need or they wouldn’t be there in the first place.
Returning to my office, I took a closer look at the fee schedule image I’d snapped. It divulged that the cost for that two week loan is $32! I didn’t have to do the math because the sign (although confusing) identified the annual percentage rate to be 278.10%. Yes, you read that right- the cost to borrow (for only two weeks) and wire $300 is $359 (20%) – $27 for the wire transfer plus $32 for the two week loan.
The research on this is clear. Faced with scarcity, people make bad financial decisions. In the case of instant cash, remember: Haste makes waste. Utilizing the services of alternative financial institutions and borrowing from predatory lenders is a bad financial decision because it costs you more in the long run. Developing and sticking to a personal money plan is the key if you have immediate money challenges.
Accredited Financial Counselors (AFC) can help. They are trained to guide you through the process. A locator for a counselor can be found at https://www.afcpe.org/find-an-afcpe-certified-professional/. AFC fees vary, but many are free because they are supported with funds from sources other than the individuals and families they serve.
Take heart. Help is a counseling session away.