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PROCESS The loan is typically given in Cash and secured by the borrower's post-dated check that includes the original loan principal and accrued interest. The maturity date usually coincides with the borrower's next pay day. On the maturity date the lender processes the check traditionally or through electronic withdrawal from the borrower's Checking Account . Payday lenders typically operate small stores or franchises, but large financial service providers also offer variations on the payday advance. Some mainstream Bank s offer a "direct deposit advance" for customers whose paychecks are deposited electronically. When a consumer requests the direct deposit advance they receive a predetermined, small cash advance. On the next direct deposit into the consumer's bank account that advance amount is removed by the bank plus a fee for the advance (usually around 10-20%). Some income tax preparation firms partner with lenders to offer "refund anticipation loans" to filers. In the United States, most states have usury laws which forbid interest rates in excess of a certain APR. Payday lenders operate in those states by funding loans through a bank chartered in a different state. Under the legal doctrine of rate exportation, established by Marquette Nat. Bank v. First of Omaha Corp., the loan is governed by the laws of the state the bank is chartered in. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware — states that abolished their usury laws — to offer credit cards nationwide. (SCOTUS 1978) EXAMPLE For example, a borrower seeking a payday loan may write a post-dated Personal Check for $115 to borrow $100 for up to 14 days. The Check Casher or Payday Lender agrees to hold the check until the borrower's next payday. At that time, the borrower has the option to redeem the check by paying $115 in cash, or refinance ("roll-over") the check by paying a fee to extend the loan for another two weeks. If the borrower does not refinance the loan, the lender deposits the check. In this example, the cost of the initial loan is a $15 finance charge, or 391 percent APR . Many states do not allow rollovers or limit the number of rollovers but, for example, if the borrower chooses to roll-over the loan three times, the finance charge would climb to $60 to borrow $100. CONTROVERSY As a form of Subprime Lending , such as high Interest Rate credit cards, payday lending is the subject of controversy. Some critics claim that payday lenders target the young and the poor, near military bases and in low-income communities, who may not understand the Time Value Of Money . Others go further, comparing payday lenders to Loan Shark s due to high interest rates — typically 250% or more when Annualized . There have been reported cases in which payday lenders have pursued criminal bad check charges, despite the fact that they (presumably) knew the check was bad at the time when it was written. Likewise, it is argued that the interest rates on payday lending (and on Rent To Own ) unfairly disadvantage the poor, compared to the Middle Class who pay at most 25% or so on their Credit Card s. Defenders of the higher interest rates note that payday loan processing costs do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR ( Compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs. A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” {Link without Title} and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments. Payday loan makers also argue that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. For example, bouncing a $100 check may inccur an NSF fee from the bank of $28 and a returned check fee of $25 from the merchant. In comparison, when expressed as APRs for two-week terms:
WITHDRAWAL FROM NORTH CAROLINA On March 1, 2006, the North Carolina Department of Justice announced the state had negotiated agreements with all the payday lenders operating in the state. The state contended that the practice of funding payday loans through banks chartered in other states illegally circumvents North Carolina law. Under the terms of the agreements, the lenders will stop making new loans, will collect only principal on existing loans and will pay $700,000 to non-profit organizations for relief. (NCDOJ 2006) SEE ALSO SOURCES
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