In response to the continuous negative feedback about payday installment loans, the CFSA or the Community Financial Services Association of America, has released, through its website, answers to frequent myths associated with this financial resource. The CFSA was established in 1999 as the national organization of lenders of short-term payday installment loans. CFSA works to promote laws and regulations for its members following a code of Best Practices that guarantees consumers with the highest standard of service.
CFSA member companies represent more than half of all payday installment loan stores located in neighborhoods across the country. Today, more than 19 million American households count a payday installment loan as their timely choice for short-term credit.
However, the industry has been plagued with controversies that the CFSA would like to contradict. Here are some of the common myths about payday installment loans:
Myth 1: Payday installment loans are extremely expensive and have exorbitant interest rates.
Reality: Payday installment loans are short term loans. Most industry critics cite a “391% annual percentage rate (APR)” which is in fact misleading. The typical fee charged by payday installment loan lenders is $15 per $100 borrowed, or a simple 15% for every loan. State laws and industry best practices do not allow predatory interest charges to happen. In fact, many states do not even allow one rollover. But in states that do permit rollovers, CFSA members limit rollovers to four or the state limit, whichever is less.
Even if the APR was an accurate representation of the fees associated with a payday installment loans, the figure is still less compared to other common credit products, see the following:
· $100 payday installment loan with a $15 fee = 391% APR
· $100 bounced check with $56 Non-Sufficient Funds & other merchant fees = 1,449% APR
· $100 credit card balance with a $37 late fee = 965% APR
· $100 utility bill with $46 late/reconnect fees = 1,203% APR
It is clear that payday installment loans are cheaper compared to incurring late fees with other credit lines.
Myth 2: Payday installment loans trap borrowers in a never-ending cycle of debt.
Reality: There have been numerous studies, recently corroborated by a public policy analysis from Clemson University, that states, “There is no sufficient statistical evidence to support the ‘cycle of debt’ argument used in passing legislation against payday lending.” In fact, in a survey conducted in 2010 by the American Payroll Association it was found that approximately 71.6% of American employees are living paycheck-to-paycheck. The vast majority of Americans have used payday installment loans responsibly. In fact, reports from state regulators and public company filings have confirmed that more than 90% of borrowers have repaid their payday installment loans when they were due and more than 95% are ultimately collected.
Many state laws and CFSA Best Practices do not allow their consumers to fall in the cycle of debt. In fact, most of the 32 states that allow payday lending, have policies concerning rollovers and loan extensions that either limit or prohibit them. In states without limits, most CFSA members limit the number of rollovers to four. And in case a consumer who is having difficulty paying back a loan when due, for whatever reason, can be offered an Extended Payment Plan, as part of the provision of the CFSA’s Best Practices.
Myth 3: Payday installment loan lenders hide fees and mislead consumers.
Reality: On the contrary, a payday installment loan is one of the most transparent loan products in the financial services marketplace with a clear and understandable fee structure. In fact, in a survey of consumers, 95% said they were aware of all the fees associated with the loan. The cost of a payday installment loan is fully disclosed to borrowers on signs in the stores and also on disclosure agreements of the loan in the lending agreement, as required by the Truth in Lending Act (TILA). CFSA members also provide their borrowers with educational brochures emphasizing responsible use of the product.
These loans are a timely solution for short term and urgent cash needs.