by Jennifer Wallis
Recently, in my home state of Oklahoma, a law was passed that allowed Deferred Deposit Lenders to set up shop. In the weeks following the legislation, storefronts have been popping up like dandelions after a spring rain. The floodgates at the state border have been opened and now a wave of television commercials, radio ads, and mass mailings are rushing into every home.
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Even a local celebrity, ex football coach has gotten into the act with a store of his very own. His familiar, smiling face adorns a flyer that promises quick, easy cash. I wanted to find out exactly what this law and these loans mean for the consumer so I did some research.
Deferred Deposit loans allow people to write a check for cash. They agree not to deposit the check until the loan is due, which is usually 14 days later. The lenders claim that they are offering a valuable service to consumers that don’t have credit-worthy banking relationships.
They give credit to those who may not be able to get it anywhere else. They meet the needs of those who may need cash for emergencies and medications. Sounds noble, right? Lenders who are taking a chance on those with less than stellar credit so that they may have a way to pay for little Jimmy’s medication. Who do I need to contact to nominate someone for sainthood?
However, this altruistic helping of their fellow person doesn’t come cheap. Not even close. A $300.00, 13-day loan costs $30.00. The consumer completes an application, provides 5 personal references, an income statement, a photo ID and a checking account statement and then writes a check for $330.00. The lender gives them $300.00 cash and then holds the check until the 14th day or the next payday. Then, they either run the check through or the consumer picks it up and gives the lender $330.00 in cash.
It’s fast, easy and convenient. Right?
True, but let’s put this in perspective. I have heard numerous credit card customers complain about their “outrageous” interest rate of 21% annual percentage rate (APR). In contrast, the corresponding APR on a 13-day $300.00 deferred deposit loan equates to 421% APR.
No, this is not a misprint. It is really 421% interest.
The deferred deposit industry is heavily regulated. They must disclose the interest rate to every consumer that obtains a loan. They supply information sheets that very clearly state that these loans are not intended for long-term monetary needs. In Oklahoma, every consumer that borrows 6 loans within a 90-day period is offered credit counseling in case they need financial assistance.
The lenders claim that the consumers willingly, knowingly enter into the agreement so they are doing nothing wrong by charging high interest rates. They say that they are offering a valuable service to a select segment of the population who may need cash and don’t have the means to obtain it through traditional lenders.
While it is true that consumers knowingly, willingly agree to pay these fees it’s still a hefty price to pay for not having good credit. Even though the lenders are required by law to disclose the interest rate and the downside to using their services, a person in need probably is going to take the cash no matter the cost if they need it bad enough.
Many times, consumers begin to rely on these loans to get them through until the next payday. Instead of using these loans occasionally to cover an emergency, people become accustomed to the quick easy cash and use them over and over again. While the lenders may claim that they are in the business to help people, an unfortunate side effect is that these consumers become trapped in the cycle of borrowing this money just to make ends meet.
The lenders say that they are trying to provide a valuable service to those with bad credit. I say that there is a fine line between helping someone and enabling them and then making a profit off of their misfortune. As the consumers continue to borrow more money, the more money the lenders make. It’s no small business. Since the law went into effect September 1, more than 300 of these lenders have moved into our state.
If these lenders really have noble intentions, I invite them to really try to help people. The way to help people, instead of enabling them, is to educate them. Give them the money they need for short-term use if you must. Then, help them break the cycle.
Teach them how to improve their credit and live within their means. Refer them to agencies who can offer reduced medications if they need it. Refer them to agencies that can help them obtain affordable housing and assistance with their utility bills. Keep sending them to counseling agencies that can show them how to save for emergencies so they won’t have to borrow money when something unexpected comes up.
This would prove to everyone that these lenders really do want to help people and that they aren’t the predators that they have been portrayed to be.
Teach a man to fish and he eats for a lifetime. Lend a man a fish at 421% APR and he’ll be back again and again whenever he gets hungry.
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Copyright © 2004 by Jennifer Wallis. All rights reserved.