Myth vs. Fact: The Truth About Cash Advances
The realities of cash advances are vastly different than the myths spread by industry critics. The following is a straightforward examination of cash advances to help separate fact from fiction.
Myth #1: Cash advances have unreasonably high interest rates.
FACT: Unlike other financial services, cash advances charge a flat fee and do not have interest accruing fees. The typical fee for a cash advance is $15 per $100 borrowed - a set price for a short-term transaction. Our customers say they appreciate that a cash advance, with a one-time fee, can be less expensive than taking on the costs of bouncing a check, missing a credit card payment or neglecting a bill.
The Federal Truth in Lending Act (TILA) requires all financial institutions to disclose loan fees as Annual Percentage Rates (APR). In order to comply with TILA, Advance America reports the implied APR of a cash advance - the amount you would pay in fees if you renewed your advance every two weeks for a full year. However, the average loan term is only two to four weeks. APR is a more appropriate measure of costs associated with loans that last for at least a year, such as a mortgage loan or a car loan. However, even using APR as a measure of the cost of various options for short-term loans, cash advances are still the least costly option compared to bank overdraft, bounced check, late payment and utility reconnection fees.
Sources: CFSAA.com; Stephens, Inc. 2011; Moebs Services 2010 Fee Revenue Study; Bankrate.com; Readex Research National Data on Short-Term Credit Alternatives 2006; Moebs Services 2010 Financial Pricing Survey
Myth #2: Advance America could still operate profitably if they charged a much smaller APR.
FACT: Some of our critics have proposed capping interest rates for cash advances, but to do so would greatly impede our ability to operate. If we charged lower fees, we would not generate enough income to pay for basic business expenses, such as rent, utilities and wages. If we were to charge an APR of 36 percent, as some of our critics have suggested, that would mean customers pay a fee of $1.38 per $100 borrowed. No business - not a credit union, not a bank - can lend money for 10 cents a day for a two-week loan term without being subsidized. Such rate-cap models overlook the significant cost of operating a regulated business, and would be an effective ban on cash advances. Our customers recognize that the price of the one-time fee is appropriate for a short-term loan, relative to other options.
Myth #3: Cash advance customers should just go to a bank instead.
FACT: Most banks do not provide the kind of small-dollar, short-term loans that our customers need. The average amount of a cash advance is about $350, an amount significantly lower than what a bank will loan. Some banks and credit unions have begun to offer products they promote as "alternatives" to cash advances, but these options are not broadly available and involve a variety of restrictions and complex fee structures. And in some cases, though our customers all have a bank or credit union account, they may choose not to obtain credit from these institutions because of a negative past experience, such as encountering hidden fees. We support a competitive market and encourage our customers to weigh all of their options before choosing our service. Cash advances are not for everyone, but our customers make informed decisions, and choose Advance America because they appreciate the simplicity, reliability and transparency of cash advances.
Myth #4: Cash advances intentionally target borrowers to trap them in a never-ending "cycle of debt."
FACT: The "cycle of debt" catchphrase is our opponents' attempt to portray our industry as taking advantage of people. Our centers and service representatives work to prevent this by making cash advances that match, but do not exceed, customer’s needs. It hurts the company, and the customer, when a loan is not repaid.
If a customer is unable to pay back an advance within the arranged timeframe, Advance America works with them to find the best way to deal with their individual situation and to repay the loan in full. For example, our centers offer an Extended Payment Plan - where available under state law - that allows customers a longer time period to repay at no additional charge. In fact, about 90 percent of our customers repay their advances when due and 95 percent are ultimately paid off.
Myth #5: Cash advance lenders prey on unsophisticated customers.
FACT: According to customer surveys, 92 percent of customers think cash advance lenders offer a valuable service and 90 percent are satisfied with their understanding of the terms and costs of cash advances. Advance America fully discloses the terms of the cash advance transaction, and prominently displays the fee for an advance on the walls of our centers.
Our customers are hardworking individuals - including teachers, nurses, bus drivers and first responders - who make a positive contribution to their community. All customers must have a steady source of income in order to receive a cash advance, and must have a checking account.
Advance America Customer Demographics
|Customers||U.S. Census 2010|
|Average age (years)||42||39|
|Median household income||$54,373||$50,046|
|Percentage with high school degree or higher||94%||85%|
Myth #6: The cash advance industry is unregulated.
FACT: Cash advances are highly regulated on the state and federal level to protect both our company and the consumer. Laws and regulations include:
• State regulations: The cash advance industry is highly regulated by state officials across the country. State laws typically limit the principal amount on an advance; set maximum fees; limit a customer's ability to renew an advance; and require various disclosures. And, most states require that a customer have the right to rescind the transaction before the end of the next business day.
• Federal Regulation: A number of federal laws and agencies regulate our business and help protect our customers, including the Consumer Financial Protection Bureau (CFPB).
• Federal Truth in Lending Act (TILA): This law requires lenders to clearly define key terms of consumer lending agreements and fully disclose all associated fees and charges, ensuring that consumers are able to compare the costs of all credit options.
• Fair Debt Collection Practices Act (FDCPA): Advance America only contracts with collection agencies that use legal, professional and non-aggressive collection practices.
• Fair Credit Reporting Act (FCRA): We adhere to strict policies that regulate the collection, dissemination, and use of consumer information, including consumer credit information.
• Equal Credit Opportunity Act (ECOA): We do not discriminate based on race, color, religion, national origin, sex, marital status, age, or because someone receives public assistance.
• Gramm-Leach Bliley Act (GLB Act): The GLB Act is designed to protect consumers’ personal financial information held by financial institutions. This prohibits the sharing of personal information about customers.
• John Warner National Defense Authorization Act limits the total charges on a small loan of 91 days or fewer to a 36 percent Military Annual Percentage Rate. As a result, we do not offer loans to military personnel.
• Industry Regulations: Advance America is also 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 cash advance industry practices. CFSA member companies must abide by a set of Industry Best Practices that offer a number of important consumer protections, including truthful advertising and fair collection practices.
Read more about laws and regulations of the cash advance industry.