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With tax refund checks soon to be heading towards Shelby County, a number of local businesses are more than willing to cash those returns now - for a price.
In the last two years, "payday loan" operations have become more and more common in the community and across the state. And while the promise of "money now" may seem tempting, the Federal Trade Commission has recently issued a warning saying that payday loans are risky endeavors that could lead to a dangerous cycle of taking out loans to pay loans and slowly falling into debt.
In order to receive such a loan, a borrower needs a pay stub, checking accounts and a list of references. Typically the borrower is required to give the lender a post-dated check for the amount borrowed, plus additional service fees. If the loan isn't repaid in the allotted time, the check is sent to the bank.
At one payday loan business in Shelbyville, a first-time borrower in need of cash can receive a $300 loan at an annual interest rate of 300 percent. But the borrower wouldn't know the interest rate is that high unless he or she reads the fine print of the contract.
Such loans are advertised as borrow $300 now and pay $352 in twenty one days. According to state statistics borrowers usually wind up paying much more.
Research by the Kentucky Youth Advocates, shows that while payday lenders market a one-time, two-week loan, "data shows this rarely occurs." Much of the profit for payday lenders comes from making repeated small cash advances to their customers. As soon as the borrowers pay off one loan, they are in need of taking out another loan to pay their bills for that week. Thus the lenders are "essentially making them long-term, high-interest loans," the report stated. Ninety percent of payday lending revenue comes from fees charged to repeat borrowers. By the time they pay back the loan and its fees, the borrower often doesn't have much left from his paycheck and may need to take out another loan, sometimes multiple loans to make ends meet. And with interest ranging up to 391 percent, it's not surprising that people could get buried in debt.
It is estimated that about $5 billion is spent by Americans in a year to borrow more than $40 billion from payday establishments.
Lower-income citizens tend to be most affected by the payday loan institutes
Fills a need
In Kentucky, payday lenders are allowed to charge up to 38 times more than the average credit card for a comparable loan.
Individual states oversee the regulation of their lending institutions. Thirty-seven states, including Kentucky, allow payday lending.
A bill that would have regulated payday loan operations passed through the House of Representatives during the 2008 legislative session. But the bill died in the Senate.
Shelby County has more than two payday loan businesses per 10,000 people. That puts Shelby County at well above the average across the state.
But the businesses fill a need, employees said.
One local employee at a payday loan operation said she has seen the loans help people get from check to check.
"If you're a single parent and your car breaks down, it really can help you until your next pay check," she said.
The employee, who spoke to the Sentinel-News on condition her name would not be released, said she often sees customers pay off on time loans and never sees them again.
She said the customers are aware of the conditions of the loan.
According to the federal Truth in Lending Act, lenders must disclose the finance charge and APR in writing.
The FTC says if you have to use payday loans, try to limit what you borrow to an amount you can pay with money from your next paycheck, yet still have enough money to last until the next check comes.
If you feel you're a victim of deceptive or unfair business practices, file a complaint at ftc.gov or call 1-877-FTC-HELP.
The FTC urges borrowers to consider the alternatives to payday loans
1. Explore the alternative of taking a small loan from a credit union or local company. Learn the interest rate of each option before deciding.
2. Look at the credit offers for the lowest cost.
3. If struggling to make payments to creditors or loaners, get in touch with them and let them know your situation. Some might be willing to work with you and offer more time.
4. Several non-profit groups offer credit-counseling services for free or close to it. If you have problems with a debt repayment plan creditors or developing a budget, get help.
5. Be smart. Don't spend money on unnecessary things. Create a realistic budget and don't venture from it.
6. Find out if your bank offers overdraft protection. If it does, it's important to know what it costs and what if covers. It could be worth it if your account is often nearing empty.