Payday Loans: Costly Cash

The Community Financial Services Association of America, the national trade association for payday lenders, says its $10 million advertising campaign is intended to educate people on how to use payday loans wisely.

But more often than not, any use of payday loans is unwise.

Payday loans are small loans that a borrower promises to repay out of his or her next paycheck, typically in two weeks. A $100 loan might carry a fee of $15.

Consumer advocacy groups are highly critical of these loans because when the fees are annualized, they often amount to triple-digit interest rates -- even more than 1,000 percent in some cases. The groups argue that the loans take advantage of cash-strapped consumers.

Last week, the payday-lending trade group announced its ad campaign.

"This is a public relations act from an industry under heavy fire," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "This is a move to derail state and congressional legislation."

Payday lenders were banned from Georgia in 2004, although lawmakers there are considering letting them back in. Other state legislatures are considering restrictions on payday loans. Last year Congress passed a law forcing the industry to cap at 36 percent the annual interest rates on loans to military-service men and women and their dependents.

Industry executives say their multimillion-dollar campaign is not an image booster. Rather, they call it an effort to encourage consumers to use payday advances in a responsible manner. They argue that payday loans are the more affordable route for people who find themselves in desperate need of money.

"If it only cost $10 to bounce a check, I'm not sure we would have nearly as big a payday loan industry," says Don Gayhardt, president of Dollar Financial, a payday lender. "Payday loans are not predatory. We enhance the economic well-being of people."

In fact, to show its commitment to helping people, the trade group is asking members to voluntarily implement new practices. The most notable is an extended payment plan for those borrowers who cannot immediately repay their loans. At no cost, borrowers would be allowed to repay loans over four extra pay periods. For example, if a customer is paid every two weeks, he would get an additional two months to pay off the loan. If paid monthly, he would get an additional four months.

I have no doubt the media campaign will be successful. The ad I viewed, which features Darrin Andersen, president of the CFSA, has soft music and shows a child with his arm in a sling and a man on the side of the road with a car obviously in need of repair. The subliminal message: If you need money to fix your kid's arm, we're here for you. If your car breaks down and you don't have cash, come to us.

Andersen advises that people should use payday advances only for unplanned short-term expenses. Borrow only what you feel you can comfortably repay, he says.