The payday lending industry increasingly is employing slick sales pitches and branding to get borrowers to take out loans that could trap them in a seemingly endless cycle of debt. Texas-based Think Finance, for instance, offers a pre-approved "Rise" loan of $2,600, but it carries an annual percentage rate (APR) of 174.54 percent and a requirement of 36 biweekly payments of $193.16. Under those terms, the $2,600 advance could cost nearly $7,000 in principal and interest.
Marketing letters for Rise do include fine print acknowledging that "this is an expensive form of credit" and "this service is not intended to provide a solution for longer-term credit or other financial needs." The front of the letter, however, includes a cheerful sentiment with a "Rocky II" tie-in that is meant to illustrate the idea of a "financial comeback" for the borrower.
A recent report by the U.S. Postal Service's Office of the Inspector General estimated that 68 million Americans have no bank account and must use payday lenders in a financial emergency. These households spent roughly $89 billion in 2012 on interest and fees for short-term loans, or about 10 percent of the average poverty-line family's yearly income. Typical payday loans are sold in stores in low-income neighborhoods, targeting consumers who may be less financially savvy. Newer lenders, however, are operating online, allowing them to dodge state laws.
The inspector general's office has proposed that U.S. post offices partner with banks to offer basic financial services, such as check cashing and short-term loans, at a lower cost than what payday lenders charge. While the average U.S. payday loan of $375 costs an average of $520 in interest alone, a Postal Service loan for the same amount could cost just $48 in interest, the report estimates.