Myth vs. Reality
Myths vs. Reality: The Truth about Payday Advances
The realities of payday lending are vastly different than the myths and propaganda spread by Advance America critics. The following is a straightforward and honest examination of payday lending to help separate the facts from fiction.
Myth#1: Payday loans have unreasonably high interest rates.
Truth: An Advance America payday advance must be paid back within a relatively short time period, and unlike other financial services, the fee does not compound interest. This product provides a proportionate remedy to meeting working people's short-term needs. And Advance America customers say they appreciate why a payday advance, with a one-time fee, can be less expensive than taking on the costs, for example, of bouncing a check, missing a credit card payment or neglecting a bill.
As required by federal law, the annual percentage rate (APR) is always disclosed for our product. But because of the short duration of a payday advance, the APR comparison is a misleading one. Payday advances are generally for two-week periods; they're not annual loans. So the typical fee of $15 per $100 borrowed equals 15 percent. To reach the triple digit APRs quoted by our critics, a consumer would have to renew an advance over and over. For example, Advance America critics often cite 391 percent APR as an average for a payday advance. But the only way to reach this rate is to rollover an advance every two weeks for an entire year-26 times! This is unrealistic considering that many Advance America centers do not even allow one rollover.
And let's consider the APR of some so-called alternatives to payday advances:
- $100 bounced check with $54 non-sufficient funds fee equals 1,409 percent
- $100 credit card balance with a $37 late fee equals 965 percent; and
- $100 utility bill with $46 late/reconnect fee equals 1,203 percent.
Myth #2: Payday loans trap borrowers in a never-ending "cycle of debt."
Truth: The "cycle of debt" catchphrase is our opponent's attempt to portray our industry as taking advantage of people. They use annual percentage rate (APR) exaggerations to paint a picture that Advance America greedily profits by forcing our customers into advances that they cannot afford to repay.
But no one benefits in this model and that is why our centers and service representatives work with customers to find an advance amount that matches, but does not exceed, their needs. If a customer is unable to pay back an advance within the arranged timeframe, Advance America offers an Extended Payment Plan to allow customers a longer time period to repay at no additional charge.
Payday advances can be a good and appropriate choice for consumers who seek a measured and responsible tool for managing their cash flow, particularly balanced against the cost of bouncing a check or missing a credit card payment. Indeed, millions of consumers have avoided excessive credit card late fees and interest, high non-sufficient funds (NSF) fees and other punitive costs for missed payments by utilizing our products.
Nearly all of Advance America's customers use short-term loans responsibly and meet their financial obligations on time. Contrary to the image presented by some of the industry's critics, our customers all have a steady source of income and active bank accounts. And they are overwhelmingly happy with the product, registering very few complaints. This product provides a proportionate remedy to meeting working people's short-term needs.
Myth #3: Lenders prey on unsophisticated customers.
Truth: Advance America customers say they understand the payday transaction and the value of the product compared to other options, and choose a payday advance because it saves them money. A payday advance can be the right option for those who experience unexpected expenses or other sudden financial needs, and have the ability to pay off the debt in a timely manner.
Nearly 90 percent of our customers have graduated from high school and most of them have earned credits toward a college degree. Ninety-two percent of customers think payday lenders offer a valuable service and 90 percent are satisfied with their understanding of the terms and costs of payday advances. Nearly half of our customers own their home, and our customers' median household income is $40, 557. These statistics show that Advance America's customers are not the uneducated, unsophisticated people who the industry critics seek to portray.
Our customers are overwhelmingly happy with the product, registering very few complaints. More than 95 percent of payday advances are ultimately paid and more than 90 percent are paid when due.
In fact, a recent staff report from the Federal Reserve Bank of New York, (January 2007), found that payday advances are not a form of predatory lending-as Advance America opponents say-but instead can help consumers by increasing credit. The report found that payday prices were lower in cities with more payday stores per capita, supporting the basic theory of supply and demand-the more options for people, the better deal they're likely to get.
Myth #4: Payday lenders provide money to people who cannot afford to pay it back.
Truth: Critics of Advance America seek to perpetuate the idea that the payday advance industry exploits the downtrodden. They have created a misconceived image of Advance America's customer base. Actually, payday advance customers represent the heart of America's middle class-consider these statistics:
- Millions choose a payday cash advance as a dignified, discreet, and often less costly solution for cash flow problems, without asking family for money or risking personal items as collateral;
- Customers are permitted to borrow up to 32% of their gross monthly income as an advance;
- If payment cannot be made within the original contract, an Extended Payment Plan may be arranged, giving customers the option of repaying advances over a longer period of time at no additional charge;
- 70% of customers choose payday cash advance for convenience; only 6% because there was no alternative;
- 92% say payday cash advance is a useful service;
- Median household income of a payday cash advance customer is $41,000;
- Average age of a payday cash advance customer is 39;
- 86% have a high school diploma or better; 52% have some college or a degree
- 45% own their own homes; and
- 100% have a steady income and active checking account, both required for a payday cash advance.
Myth #5: Payday lenders oppose regulations of the industry.
Truth: Advance America is a founding member of the Community Financial Services Association of America (CFSA), whose mission is to promote laws that provide substantive consumer protections and to encourage responsible industry practices.
And for more than 10 years, Advance America, along with the CFSA, has worked with state and local officials to craft measures that balance access to payday advances with protections for the small number of customers who misuse our service and jeopardize their financial health.
All Advance America centers comply with the Truth in Lending law and provide full and upfront disclosure of the terms and costs of an advance. And we strongly support programs that raise consumer's awareness about financial literacy, and efforts to educate them about making sound long-term decisions related to their money.
Despite the industry's good-faith efforts to formulate reasonable regulations, some state lawmakers have sought to abolish our industry through the guise of "reform" regulation; they have proposed capping interest rates for advances. For example, a 36 percent rate cap translates to $1.38 per $100 borrowed, or about 10 cents per day for a typical two-week period-not enough to pay for basic expenses like wages, rent, utilities and supplies. This model overlooks the significant cost of operating a regulated business, and would be an effective ban on payday advances.
Through active cooperation with the industry, thirty-seven states and the District of Columbia have instituted regulations on payday advances.
