During the Financial Crisis of 2008, Warren Buffet, the Chairman and CEO of Berkshire Hathaway Inc. characterized derivatives as “financial weapons of mass destruction” or financial W.M.D.s. These instruments turned out to be enormous bets placed on worthless subprime home loans that were made without regard to the borrower’s income or creditworthiness and later sold to investors. As homeowners continued to default on their mortgage payments, the holders of these financial W.M.D.s (e.g., big banks and large insurance companies) mounted huge losses causing massive economic fallout. Now, let us fast forward to the present. Payday loans are just another form of subprime lending. According to the U.S. Office of the Comptroller of the Currency, payday loans “often fail to consider the customer’s ability to repay the loan while still meeting other financial obligations.” Moreover, “the combined impact of an expensive credit product coupled with short repayment periods increases the risk that borrowers could be caught in a cycle of high- cost borrowing over an extended period of time.” Simply put, payday loans are financial “weapons of individual destruction” (W.I.D.s).
The federal regulator for credit unions, the National Credit Union Administration (NCUA), defines payday loans or financial W.I.D.s as small, short term, high interest loans that borrowers promise to repay from their next paycheck or direct deposit salary account. These W.I.D.s require the borrower to either: 1) write a check to the lender that is held until repayment or 2) authorize an automatic electronic debit from the borrower’s account when payment is due. Generally, the funds issued to the debtor are minus a flat fee. For example, if the borrower desires a $100 loan, he/she will have to borrow $115 to receive the $100 from the lender.
In addition, the Truth in Fair Lending Act requires the lender to disclose the annual percentage rate of interest on the loan. Therefore, a $15 fee on a $100 loan although seemingly small has an excessively high A.P.R. of 391%. When payment is due, the debtor then must choose to either pay the $115 or roll it over to the next payday and pay an additional $15 fee. With three or four roll-overs, the borrower will incur fees of $60 – $75 in a matter of weeks for a paltry $100 borrowed. This type of lending places the borrower in a never-ending cycle of debt because of other financial obligations becoming due at the same time, making the roll-over as the convenient option of choice.
Payday loans victimize people from all walks of life. From lawyers to marketing professionals, senior citizens to postal workers, many have found themselves trapped within the clutches of payday lending. Major banks are now engaged in it. A study conducted by the Center for Responsible Lending reported that over one quarter of bank payday loans are issued to Social Security recipients. Bank federal regulators have gone on the record stating that they are “deeply concerned” about the practice, it being “unsafe, unsound and unfair to consumers.”
Plain and simple payday loans or W.I.D.s are predatory lending at its best. It is legal loansharking! Currently, in New York they are illegal and it should remain so. Credit unions are reasonable alternatives for short term lending at modest rates. As a matter of fact, the Municipal Credit Union (MCU) was chartered to combat this type of predatory lending. Soon, under the direction of our President/CEO Kam Wong, MCU will be rolling out its short-term emergency loan program to assist members in making ends meet. Say no to payday W.I.D.s and protect yourself from these financial weapons of individual destruction. Join a credit union today!