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“The cost to issue a loan is well above the fee we would make if the APR was set at 36 percent. In fact, at that rate we would only collect 69 cents for a $100 loan for a week, which wouldn’t even pay the employee to process the loan, let alone cover rent or other overhead expenses,” she explains.
“The smaller the dollar amount and the shorter the loan period, the higher the APR has to be in order to break even. The APR that we need to charge to make a profit and cover expenses at my company is 417 percent, which translates into a relatively small fee. If a customer borrows $100 for four days, the fee is only $4.57.”
Further, Gibson says her industry encourages the responsible and informed use of its financial products. “Legislation has been passed to help reduce the cycle of debt that borrowers can get into. One Utah law requires short-term lenders to stop charging interest on a loan after 10 weeks, effectively enforcing a 10-week interest cap,” she explains.
Another Utah law requires payday lenders to offer interest-free extended payment plans. “These are two effective ways to help ensure borrowers can repay their short-term loans, avoid collections and reduce the need to take out multiple loans.”
Gibson also points out that of the one million-plus cash advance transactions in Utah in 2010, the industry received less than 10 complaints. However, those complaints were made to the Utah Department of Financial Institutions. In truth, more complaints were filed to the Utah Better Business Bureau (BBB).
Jane Driggs, president of the BBB in Salt Lake City, says in 2010 her office received 256 complaints against Utah-based payday lenders—a 52 percent increase over the previous year. Nationally, the BBB received 1,143 complaints against payday lenders. If you do the math, nearly one out of four complaints was against a Utah payday lender. Nonetheless, compared to the million-plus loans generated by Utah payday lenders in 2010, the number of complaints is fairly negligible.
Despite the criticism from consumer advocates, Gibson says the payday lending industry thrives because it provides a valuable service. “It is very rewarding work, especially with the positive feedback we receive from our customers,” she says. “All types of unexpected events can come up and, unfortunately, many people do not have a backup plan.”
On the other hand, Cochrane believes many payday loan customers “are addicted to spending and don’t have the money.” Thus, they get over-extended and caught in a debt trap from which they cannot get out.