Sen. Sherrod Brown (D-OH) offered an alternative to payday loans that would give taxpayers an option to get an advance on their expected income tax refund, WMFJ reported. The proposal would allow an interest-free advance of as much as $500 from tax refund money, allowing consumers to save the high interest rates typically paid with payday loans.
“The couple of months before they’re eligible to get their tax refund they might have some serious financial problems where they just need a few hundred dollars to be able to tide themselves over until they get their refund, we would advance $500 of this no more than that under our plan,” Sen. Brown said about his alternative to payday loans.
Regarding Sen. Brown’s plan, the Cincinnati Business Courier reported, “The program differs from payday loans in two key ways: It’s based on earned income tax credits rather than future paychecks and it comes at zero interest and with zero fees.”
Payday loans have been a target of consumer protection efforts in the past because of their high interest rates, the Inquisitr reported recently. A large number of consumer protection groups urged the creation of national regulations on payday loans. The group said “it’s time to end the scam,” and demanded regulations to end what is claimed to be consumer abuse by payday loan providers.
In many instances, consumers take out payday loans to cover short-term expenses or bills, only to find themselves continuing to re-borrow that same money via the payday loan and paying the finance charge, typically twice per month, repeatedly. A typical payday loan of $300 with $45 in finance charges could have a consumer paying $90 in finance charges per month to perpetually re-borrow the same $300 principle. Under such a payday loan, the consumer will have paid as much as $540 in final charges to borrow that $300 for a period of six months.
The CFA PayDay Loan Consumer Information site defines payday loans as follows.
“Payday loans are short-term cash loans based on the borrower’s personal check held for future deposit or on electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.”
Payday loans are typically made by post-dated check, which is cashed or held for another two weeks or half month until the interest charge, or the payment of the amount borrowed plus interest on the payday loan, is paid. Payday loans typically have a finance charge of between $15 and 30 per hundred dollar borrowed, which calculates to an interest rate of 390 to 780 percent APR. Payday loans carry the highest interest rates of any legal loans.
[Image of Senator Sherrod Brown from Wikipedia]