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Payday loans are more costly than you think, says professor

October 21, 2003


The ads are on TV, the radio and the Internet: Get Cash Fast! But did you know that the annual percentage rate for one of these cash advance loans can be 391 percent and higher?

Dr. Jerry Plummer, assistant professor of economics at Austin Peay, says payday loans (a.k.a. cash advance loans, check advance loans, post-dated check loans) carry extremely high rates, and often are hard for the borrower to pay off.
October 21, 2003


The ads are on TV, the radio and the Internet: “Get Cash Fast!” But did you know that the annual percentage rate for one of these cash advance loans can be 391 percent and higher?

Dr. Jerry Plummer, assistant professor of economics at Austin Peay, says payday loans (a.k.a. cash advance loans, check advance loans, post-dated check loans) carry extremely high rates, and often are hard for the borrower to pay off.

“Payday loans, legal in many states, including Tennessee, often carry annual percentage rates of 391 percent and higher,” he says.

So why do they continue? Marketing.

“Large amounts of advertising are used for these loans. Television, radio, newspapers and the Internet are all loaded with solicitations for quick payday loans, often touting the 'low interest rates.'”

When borrowers cannot pay the full balance due, these companies often use the practice of “flipping,” inviting borrowers to pay a part of the loan and refinance the balance.

“It is not unusual for the original balance, or close to it, to be the 'new' loan balance, even though no additional funds were lent,” Plummer says.

He adds, “It is important for potential borrowers to be aware of these pitfalls and to explore other methods [of meeting their obligations] to avoid paying these high interest rates.”
—Rebecca Mackey