How Fair is “Check into Cash”?Nguyen Hoang Long

MA0N0218

History

► 1st Check into Cash 1993, in Cleveland, Tennessee, USA► 1,100 centers ► 22,000 pay-day advance lenders► In 2005, Check Into Cash was the second largest payday loan company in the US► Payday advance companies that belong to the Community Financial Services Association of America(CFSA)

The business model

► Small, unsecured

► Short-term loan from $100 to $1000 offered by a payday lender

► Solve temporary cash-flow problems with out bouncing a check or incurring late-payment penalties

The business model (Cont.)

► Borrowers:

- Write a personal post-dated check for the amount they wish to borrow

- Plus the payday loan fee.

► Check Into Cash:

- Holds their checks until payday when the loans are either paid off in person

- The check is presented to the borrowers’ bank for payment.

- A typical fee is $15 for every $100 borrowed.

Debate on the “fairness” of payday-advance loans

► A borrower who rolled over an initial $100 loan for the maximum of four times would accumulate a total of $75 in fees all within a 10-week period.

► Fees/year = (365/70) * 75% = 391%

► An annual rate of 391% is a huge cost in relation to interest charged on home equity loans, personal loans, and even credit cards.

Arguments from advocates

Most payday loan recipients do so either because funds are unavailable through conventional loans or because the payday loan averts a penalty or bank fee which is, in itself, onerous.

► The cost for $100 of overdraft protection is $26.90, a credit card late fee on $100 is $37, and the late/disconnect fee on a $100 utility bill is $46.16.

► Bankrate.com reports that nonsufficient funds (NSF) fees average $26.90 per occurrence.

Conclusion

Useful A payday advance can be a viable option to meet

a short-term cash flow problem despite its high cost.

Harmful Someone who continuously relies on a payday

loan to try to make ends meet, payday advances can seriously harm one’s personal finances.