What’s the difference between a payday loan and a loan shark? Not much, except payday loans are legal.
Loan sharks, or shylocks, use the “five-for-six” loan values. In other words, if you were to take out a five-hundred-dollar loan, you would have to pay back $600.00. For a short-term loan, this adds up to 500% if you are being charged 20% a week. The loan sharks count on the fact that most people get themselves into a hole and will be in debt to the shylocks for their natural lives. The loan sharks use intimidation and threats to keep people in line.
If you were taking out a payday loan, you have the actual interest regulated, but the payday loans also charge “service fees” and the interest on service fees. With the hidden charges, service fees and other sundry fees, the interest rates go up to 300% or more. Like the loan sharks, the payday companies try to persuade the borrower take out more money than they need. When the loan is due, the borrower discovers that his or her whole paycheck is gone and the cycle begins again until the borrower is in way too much debt. There is no way for the borrower to get out of debt and they can’t save money.
Loan sharks can make threats to the person and his or her family to get money and carry out the threats, if only to show people what can happen if you don’t pay. If you lose your job and you are in debt to the payday loans, they have the legal means to threaten you. They can get judgments against you, which will follow you for the rest of life.
The victims of loan sharking and payday loans are the people who can least afford it: minimum income families; the elderly on social security; low-income families without health insurance who needs medical attention; and minorities. Most of the people who need the payday loans are people with no, little, or bad credit risks.
Many States have banned payday loans. The payday loans have turned to the Internet to bypass the bans. The Federal Trade Commission and FDIC have given a breakdown of how the payday loans work:
“At the same time, though, online payday loan options are springing up, most often operating out of one of the ten or so states that impose no limitation on interest rates. In those states, annual interest rates often approach 1000%. That means that a borrower who ended up keeping the loan open for a full year, were that possible in the state in question, would pay $1000 in interest on a $100 loan.
Our original borrower who paid $25/$100 for a $300 loan would end the year having paid back $2250 on that original $300. For a borrower whose finances are already tight-and that’s true of nearly every payday loan store borrower-that additional outlay can be fatal to financial stability.” (http://www.totalbankruptcy.com/overview/financial-literacy/lending/payday-loan-stores.aspx)
Payday loans are not consistent with an reasonable free market because the people they are targeting cannot afford them, and the ads that recommend payday loans are misleading.