Payday Advance Fees

In California, the maximum fee for a payday advance is 15 percent. Therefore, if a customer decides to take out an advance for $100, he/she will pay a maximum fee of $17.65, while most companies only charge a $15 fee. This one-time, flat-rate fee reflects the high costs and risks that accompany the payday advance industry.

THE TRUTH BEHIND APR's

In an effort to compare payday advance fees to those imposed by credit cards, some people have used annual percentage rates (APRs). Unfortunately, APRs are an irrelevant measure of our industry's fees since it is impossible to carry a payday advance for a year.

• APRs apply only to the interest rates on annual loans, not to one-time fees. It is misleading to apply APRs to fixed fees, such as those charged by the payday advance industry. Most states recognize this inconsistency and base payday advance fees on the check amount, not on APRs.
• APRs measure only fees. They ignore the risks involved with providing a payday advance, and an accurate evaluation of payday advance charges must factor in risks.
• Currently, companies must disclose the fixed fee and hypothetical APR to help consumers make direct comparisons to loans, credit card advances and other financial options. This disclosure serves as purely an illustration despite the fact that a payday advance is not an annual loan.

EVALUATING PAYDAY ADVANCE FEES

The correct comparison to make is with the cost of a bounced check - which is frequently a customer's only alternative in a short-term financial bind.

• More than 28 percent of California residents said they had bounced at least one check in the past year, according to the survey by I/H/R Research Group.' One in 10 said they had bounced three or more checks in the past year.

As also shown by the survey, the demographics of consumers who bounce checks are very similar to those who obtain payday advance services.

• Among respondents who stated having bounced at least one check in the past year, the majority (54 percent) has an annual household income of $30,000 or more, and one-third (32 percent) has a household income of $50,000 or more.

SURVEY NOTES

A total of 502 residents of California were surveyed March 4-7, 1999, by @ Research Group, a company based in Santa Ana, CA, with its telephone center in Las Vegas, NV. All respondents shared responsibility for their household's bills and all have a regular source of income to cover their monthly living expenses. The sampling error is plus or minus 5 percentage points at the 95-percent confidence level. These results were obtained from Community Financial Service Association, the national trade association of the payday advance industry.

The following chart examines the cost of bouncing a $ 100 check against the cost of obtaining a $ 100 payday advance. While a payday advance involves a single, up-front fee, a bounced check can result in two or more fees - the bank's non-sufficient fund (NSF) fee and the retailer's charge for returning the bounced check.

By choosing to bounce checks, Californians typically pay approximately three times the amount of payday advance fees. Also note that cash shortfalls can result in multiple bounced checks, thereby dramatically increasing total costs.

In comparison to bounced check charges, therefore, the payday advance industry clearly saves money for consumers. In fact, consumers regularly choose to use a payday advance in an emergency to avoid bouncing a check.

NOTE: The Consumer Federation of America's June 1998 report, Bounced Checks: Billion Dollar Profits, quotes, "According to the Federal Reserve Board's Annual Report to the Congress on Retail Fees and Services of Depository Institutions (June 1997), large banks assess bounced check fees of $20.29; medium-sized banks' average fees are $18.97; and small banks charge  $15.05."