February 23, 2010
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News: Picking Up The Pieces After CARD Act
At least one group expects to benefit from the Credit CARD Act 2009 that became effective yesterday, and it doesn't look like the winners will be cardholders. As Americans face stiffer lending rules and increased scrutiny from lenders about who they choose to issue credit cards, many individuals with less than perfect credit will begin looking for alternative ways to manage finances. Discouraged cardholders wanting to escape the burdens of higher interest rates and credit card companies' strong holds have already begun seeking other means of living from paycheck to paycheck. So what's the answer; payday lending companies.
Lower and middle income families have been flocking to payday lending companies for short term loans to help them meet expenses form one pay check to another. Unlike a credit card loan, these companies provide pay day loans sometimes called a paycheck advance or payday advance. Companies like Cash America International Inc. and Advance America Cash Advance Centers Inc. Americans will be surprise to learn that interest rates charged by payday lending companies on the surface may appear comparable to the average APR of a credit card; however, when calculated out the interest rate is extraordinary. Finance charges on payday loans are typically in the range of 15 to 30 percent of the amount borrowed for a two-week period. In terms of APR, this amount translates to rates ranging from 390 percent to 780 percent.
Here's how it works. The borrower writes a check for the amount borrowed plus the interest. The check is post dated for the two weeks at which time the lender deposits the check. If the individual does not have the funds to cover the check, he is then assessed a non-sufficient funds fee plus additional interest. It's difficult to say whether the added fees for not paying back the payday company as agreed compares to late fees and interest paid toward a credit card company if payment is late. Still it's a sure bet payday companies have a lot to gain as the financial industry continues to struggle managing a profitable business under the terms of new regulations. The industry has already reported that fourth quarter profits have more than doubled over the past year.