What is a payday loan?
A payday loan, also known as a payday advance or cash advance, is a short-term, unsecured loan. Payday loans typically have these features:
- They are small loans, usually less than $1,000.
- They have extremely high interest rates with representative APRs in the range of ~400-800%.
- They are due by your next payday.
- They require you to write a post-dated check that the lender has the option of cashing if you don’t repay by the due date.
Who uses payday loans?
Anyone with a checking account and a steady income can use a payday loan, but payday loans are most commonly used by people without access to credit cards or savings accounts. They typically have no credit or bad credit. Research indicates that most of the borrowers are white women between the ages of 25-44. However, people in the following demographics are more likely to have used payday loans:
- People with low incomes
- People who are under-educated
- Military personnel
How much do payday loans cost?
Payday loans typically cost between $10 to $30 per $100 borrowed. Let’s take a look at a typical two-week payday loan that carries a fee of $15 per $100 borrowed. This translates to a representative APR of 390% ($15 per 2 weeks = rate of $390 per year, based on $100 borrowed). A $500 loan at this rate would cost $75 interest in just two weeks.
Why do people use payday loans?
People who use payday loans aren’t “financially stupid.” They just have no other options and are desperate. According to Pew studies, more than half of Americans have less than a month’s worth of savings, and about 70 million Americans don’t have or don’t qualify for a traditional bank account. When a crisis hits, they may have no other options.
Why did Google ban ads on payday loans?
Google states that their new policy is designed to protect their users from deceptive or harmful financial products. They are no longer allowing ads for loans that must be repaid within 60 days or have an APR of 36% or higher. Google released the following statement regarding their ban on payday loans, effective July 13, 2016.
When ads are good, they connect people to interesting, useful brands, businesses and products. Unfortunately, not all ads are–some are for fake or harmful products, or seek to mislead users about the businesses they represent. We have an extensive set of policies to keep bad ads out of our systems – in fact in 2015 alone, we disabled more than 780 million ads for reasons ranging from counterfeiting to phishing. Ads for financial services are a particular area of vigilance given how core they are to people’s livelihood and well being.
In that vein, today we’re sharing an update that will go into effect on July 13, 2016: we’re banning ads for payday loans and some related products from our ads systems. We will no longer allow ads for loans where repayment is due within 60 days of the date of issue. In the U.S., we are also banning ads for loans with an APR of 36% or higher. When reviewing our policies, research has shown that these loans can result in unaffordable payment and high default rates for users so we will be updating our policies globally to reflect that.
This change is designed to protect our users from deceptive or harmful financial products and will not affect companies offering loans such as Mortgages, Car Loans, Student Loans, Commercial loans, Revolving Lines of Credit (e.g. Credit Cards).
Here’s what the Consumer Financial Protection Bureau (CFPB) has to say about payday loans.
What do I think about payday loans?
Personally, I don’t believe in payday loans. I think the fees / interest rates are too high, and payday lenders are predators taking advantage of those in difficult circumstances. However, after doing a bit of research for this post, I am able to better understand why those with no other options might take out a payday loan in desperation. I believe payday loans should only be used as a last resort, and people should look to other options before taking out a payday loan.
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