Payday lending is a rip-off for consumers. According to the Washington State Department of Financial Institutions (DFI), the industry grew by 84% over the past three years and is now making over $1 billion in loans each year.

Payday loans in Washington cannot exceed $700 for a maximum term of 45 days. Lenders are allowed to charge fees up to $15 per $100 on the first $500 borrowed and $10 per $100 on any amount over $500.

DFI studied the four payday lenders that make more than half of the loans. All charged the maximum fees allowed. These fees translate into shocking interest rates.

A $300 loan for five days has a 1,095% annual percentage rate (APR).

Since the fees are paid up-front, the same loan held for the maximum 45 days has an
APR of “only” 121.67%. Unfortunately, people who use payday lending keep coming back. Even though each loan is limited to 45 days, DFI found that almost 50% of borrowers used payday loans more than once and nearly 10% took the loans 20 or more times.

DFI also documented payday lender collection practices including illegally threatening criminal prosecution for check fraud when borrowers were unable to pay within 45 days. Lenders also told parents they would lose custody of their children — and children that their parents would be going to jail.

Alternatives to payday loans exist. Banks, credit unions, and even credit card cash advances can cost considerably less. Creditors will often allow additional time to pay a debt. Even late fees can cost less than a payday loan. The Center for Responsible Lending (CRL) says that “the payday lending business model is designed to keep borrowers in debt, not to provide a one-time assistance during a time of financial need.”

A nationwide CRL study found that 91% of payday lenders’ business comes from borrows who take five or more loans a year. Avoid the debt trap. Don’t take a payday loan.


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