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Pay-day
Loan Companies
The
vicious sharks of the loan pool
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Cash is short and you need money quickly. And of
course you happen to have seen the ads for one of those cheque-cashing
places. You know, guys walking out looking elated - like they
just got their first date. How could anyone not be elated - until
of course they realize they just handed over a large chunk of
their money to these loan sharks. And as a student, coming off
a financially draining school year, the time until your first
summer pay cheque can seem an eternity leaving these loans all
too tempting.
How slippery is the your shark?
But perhaps the term shark sounds a little harsh? Well let’s
look at the facts. A regular bank loan may seem a little steep
at 9% annually, a cash advance a rip off at 19%, and a balance
on a specialty retail card disgusting at 22%. But how about a
payday loan? To start with, you may pay 2 ½ to 3% of the
loan amount for a 14-day advance. In addition you usually pay
a $2 transaction fee on top of that. (If you were to use a personal
cheque on this account you may incur fees of $10 - $15!) So on
a $300 cash loan you would pay around $11 for 14 days, which works
out to about an 88% annual interest rate. Perhaps “shark”
isn’t such a harsh term after all!
So why would anyone make use of these? Often it
is people with poor or spotty credit ratings or those without
a lot of assets to put up to secure a loan, (and who thus don’t
have ready access to as many other forms of borrowing), that end
up using these. Interestingly one of these national chains says
it is the “late hours, convenient locations, no line ups,
and fast, friendly, personal service” that cause people to
choose them. ? Let’s be honest, people use this because they
are in a pinch for cash and have a little if any choice! Do they
really feel that people don’t mind getting gouged since the
person gouging them is wearing some phoney smile? The proliferation
of these operations has caused consumer groups in Canada and the
U.S. to increasingly push for a clamp down on them. Even some
politicians are pushing for closer regulation of them. Some jurisdictions
for example have caps on how much can be loaned under these arrangements.
However the regulation is still inadequate, so responsibility
still falls on consumers to steer clear of these.
The bottom line is: Avoid these at any cost.
These loans usually end up costing plenty to those who can least
afford it and have fewer alternatives to choose from. Ideally
a short-term loan from a parent or guardian is preferable, however
this frequently isn’t an option. Your next best option is
to secure a small line of credit, say $1000. Thus if you were
to take out $300 on your line of credit prior to payday, you are
only charged interest on the money you take out and are not penalized
for paying the money back completely in a short time (i.e. on
that much awaited pay day). Some banks or trust unions offer credit
lines specifically for students (perhaps with a parent or guardian
as a co signer). Other institutions offer what they call account
overdraft, which allows access to cash for temporary cash crunches.
Alternatively you may want to see if you can take
out a regular loan with a parent or guardian as a co-signer. The
problem with these is some banks have higher minimums, say $5,000,
which means you may have to pay interest on the full amount borrowed.
While a regular bank loan may not be an option open to everyone,
it is still a far better option than pay day loans. Start by trying
the bank that your parent or guardian deals with and/or financial
institutions that grants smaller loans. Try and take out as small
a loan as you need and check on any penalties for paying the loan
off early along with any extra fees such as insurance (which they
will try and sell you).
While being low on cash and sometimes in a real
cash crunch, can be a common experience for many students, falling
prey to the open jaws of these cash gougers doesn’t need
to be. Explore all your options, even if you are getting turned
down at the first places you inquire. If you are turned down from
one banking institution shop around at others. Your perseverance
could save you a bundle.
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