Online Cash Advance Industry Battles Unfair Rate Statements by Media, Politicians

by Joel Weaver
Many in the media are putting what is commonly known as "payday loan" industry under the microscope. They convert the fees the lenders charge to an annual percentage rate (A.P.R.) and show it in a very negative light, citing the A.P.R. as "over 450%." That's a misleading number, industry executives are quick to point out.

LoanPointUSA is one of the nation's top online lenders. Along with most others in the online loan industry, it adheres to the same Truth in Lending practices that banks and credit unions do, as mandated by the Federal Government.

When a bank issues an installment loan, it charges the borrower a percentage. The rate is figured over the long term, and the A.P.R. is stated. Over the course of a standard 30-year loan, at 5% interest, the amount the borrower pays in interest charges is more than the purchase price of their home.

The online lender charges a fee, not a percentage rate. The typical short-term loan from LoanPointUSA is paid back in two weeks with fees of $30 per $100 borrowed. Converting that to an A.P.R. will work out to be an astronomical number. A cash advance is not designed to be a long-term loan, and should not be regarded as such.

Comparing apples to apples…

Because online cash advance lenders charge a fee, the comparison should be made to a fee that a bank charges - like an insufficient funds or "bounced check" fee. On the average, banks charge a $30 NSF fee when it pays a check that takes the account below zero balance. The bank does this as a convenience to its customer to save him the embarrassment of bouncing a check. Most of the time, it is done automatically.

Let's say the check in question is $50 for the phone bill, and the fee is $30 because the account went below $0. The bank knows its customer will be depositing the money, so it has no worries. It just generates a notification and sends it through the mail.

Converting the bank's fee to an A.P.R. works out to be more than twice what LoanPointUSA states as its A.P.R. It's an astronomical 1011%. The banking industry's insufficient funds fees generate over $2 billion annually.

The online lender provides a service for people who need short-term loan to solve a temporary financial crisis. Much like credit cards, consumers must use the service wisely.


About the Author

Joel is the Community Manager for Geneva Roth Companies