A pay day loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 percent. The average borrower ends up paying back $793 for a $325 loan.
The loans on offer have an Annual Percentage Rate (APR) of up to 391 percent -- excluding fees and penalties. All you need for a loan like this is proof of regular income, even government benefits will do. These loans provide the necessary cash to meet short term emergency needs. Usually, these loans are available to you for a period of 14-18 days, although some lenders offer it for a period of 31 days.
While hard figures are hard to come by, evidence from nonprofit credit and mortgage counselors suggests that the number of people using these so-called "pay day loans" is growing as the U.S. housing crisis deepens, a negative sign for economic recovery.
It is estimated that pay day lenders issued more than $28 billion in loans in 2005, the latest available figures.It takes the average borrower two years to get out of a pay day loan because of the astronomical interest rates.Bill Faith, executive director of COHHIO, an umbrella group representing some 600 non-profit agencies in Ohio, said the state is home to some 1,650 pay day loan lenders.
"Pay day loans are insidious because people get trapped in a cycle of debt."
It takes the average borrower two years to get out of a pay day loan, he said.
Robert Frank, an economics professor at Cornell University, equates pay day loans with "handing a suicidal person a noose" because many people can not control their finances and end up mired in debt.
"These loans lead to more bankruptcies and wipe out people's savings, which is bad for the economy," he said.
"This is a problem that has been caused by deregulation" of the US financial sector in the 1990s.