Why Payday Loan Providers are Predatory

     They make money by collecting interest on the funds they loaned out. Just like a bank, credit union, or loan shark.

     But it all comes down to the Annual Percentage Rate.

     Wait a minute you say, “When I borrow money from the my corner payday loan provider, I paid back my loan in 7 to 10 days. Why are telling me about Annual Percentage Rate?”.

     Because that's one of the main numbers they care about. They lose sleep if that number goes down.

    Give me a minute to explain how the APR applies to the payday loan industry.

     Let's say this past Friday you borrowed $500.00.  Now the following Friday, you have to pay back the loan in one lump sum because they do not offer payment plans.(I will talk about how you can get a payment plan in the future blog).
      Your payment of $500.00 plus interest is due in 7 days, for a  total amount due of $550.00.

     If you are quick with percentage math, you can see that you are paying back only 10 percent.

                                           (50/500) * 100=10%

    So, why is everybody saying that these payday loan provider are predatory, charging up to 300% interest.

     Well, as I said earlier, the number that they care about is the Annual Percentage Rate.

      You paid back your loan in 7 days. They keep the $50.00 interest you paid back, and then on the same day, the $500.00 principal, they lend it out to a different customer.

     Every week for a year, someone borrowed $500.00 and every week that someone paid back $550.00.

     Every week, every week, remember that. For 52 weeks this process took place.

May be you borrowed once from the payday loan provider during that year, twice, or may be you borrow with greater frequency.

      The payday loan provider does not really care who borrows the funds, as long as someone does. They do not want those $500.00 sitting in their safe doing nothing. They want those funds out in the world collecting interest.

     Forgive me. Here is  a little more math:

                               52 weeks * $50.00=$2600.00

     Your local friendly payday loan provider collected $2600.00 on $500.00 principal. That's a whopping 520% interest rate. Remember when they were being called predatory while being accused of charging 300% APR, so what should we call them now when they charge 520% interest.

     I hear you saying, “that's just not true.”  They lend out $500.00 every week, so that should be:

                                               $500.00 * 52 weeks=$26000.00

     If we repeat the previous interest rate calculation, we get only 10%. “That's less than most credit cards,” you say.

     Here is the kicker, they are lending out the same $500.00 every week. Someone borrows the funds one week, the funds are paid back, and then the same funds are on loan again the following week.

     This is the main reason some people accused payday loan providers of predatory behavior. There are other reasons I will address in the future.

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