Tony Main's parents sat him down for a talk before he left in August for his first year of college at Ball State. Money is one of the major issues for college students and Main's parents wanted to give him some advice on how to handle money problems.
They told him to never go to a payday advance company.
"They told me it costs a lot to do that," he said. "They didn't want me to waste my money on that and if I needed it that bad, I could ask them."
Payday advance companies, such as Check Into Cash and Check 'N Go, offer short-term loans for which the borrower is charged a fee per $100 charged, Stuart Robinson, spokesman for the Community Financial Services Association of America, said. The average fee is $15 for every $100 borrowed, but it varies by location.
"Say Bob is a working guy with a wife and two kids and they're struggling paycheck to paycheck and he needs new brakes," Robinson said. "He can go [to a payday advance company], write a check and date it as the day of his next paycheck and can let them deposit it or he can come pay cash and rip the check up,"
While the premise behind offering paycheck advances through loans appears to be a reasonable convenience, the ultimate paid price can be high, Robinson said.
When the fee is converted into an Annual Percentage Rate, the percent interest loans are based on, the APR can reach 2,000 percent in extreme cases, according to a CNN article.
APR is calculated by multiplying the interest by the amount of time rate is applied, Patrick Barkey, director of economic and policy studies, said.
For example, a $15 fee on a $100 loan for two weeks equals 390 percent APR.
"Our critics like to cite astronomical APRs, and that's true," Robinson said. "It's disingenuous to apply [APR] to a loan of two weeks." A payment based on a fee is not the same as applying an interest rate to a loan, he said.
The idea of applying APR to payday advance loans is a good idea to Barkey. It doesn't make a difference whether or not the lending fee is converted APR, he said.
"The idea of APR gives you comparability," he said. "Lending laws require [interest rates] to be expressed that way." Ultimately, short term lenders, such as payday advance companies, should be mandated to present the fee in terms of the APR, Barkey added.
Even though the APR is high, Barkey sees such institutions as a benefit for people who need to use them.
"[Economists] would rather see very expensive credit offered to someone than no credit," he said. "If this is the only line of credit they can get, then that's what we want to see."
Problems arise when borrowers find themselves having to roll over the loan and pay more fees because they didn't have the money at the time of repayment, Robinson said.
"The industry isn't the police over people's finances," he said. "The idea is this is a one time transaction to get them through to their next paycheck."
The CFSA is currently working on legislation in 36 states and the District of Columbia to create more consumer friendly guidelines.
Robinson isn't opposed to usury laws, laws that regulate the lending industry, and said the industry is willing to compromise, but there are some people who just want the payday loan business outlawed.
"As a whole, people in general, put the lending industry in a cloud of suspicion, and is part of the reason why some states have outlawed payday advance institutions," Barkey said.
"You have to put your history hat on, and I'm talking a long time ago history," he said. "Lending was considered immoral and that's why you see some states will have more usury laws."
"We're in favor of responsible regulation," Robinson said. "A payday loan is not the best situation for everyone . . . but it may be the best choice among several less desirable options."
For now, Main said he will stick to asking his friends and family for help with money if he needs it, rather than risk making a bad situation worse with payday advance companies, he said.
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