The popularity of payday loans, or cash advance loans, as they are sometimes called, is growing faster than just about any type of business in America. The short-term cash loan stores now outnumber most fast food chains. In fact, in Mississippi, the number of such stores outnumber McDonald’s restaurants by a ratio of eight to one. What is the appeal of payday loans?

Also known as quick cash loans, these lending instruments are short term loans of $100-$500 with a duration of two weeks. The customer may obtain the cash from a storefront location that can be found in almost any neighborhood. All the customer needs to obtain a loan is a steady job, a checking account and identification. No credit report or inquiry is required of the customer, and the loan can usually be processed in just a few minutes. In exchange for receiving the cash, the customer writes a postdated check for the amount of the loan plus the fees added by the business. The fees average about $15 per $100 borrowed, but can run as high as $30 per $100 borrowed in some locations. Two weeks later, the customer can repay the loan in person. Alternatively, the store can simply cash the postdated check.

The fees may not seem like much, and few customers object to paying a $15 fee to borrow $100. What many of them fail to realize is that the fee, when viewed as interest on an annual basis, can amount to as much as 391% annually. This is a far more expensive way to borrow than a credit card loan, which might charge the customer 20%-30%. Many customers find the loans hard to repay, and they often have to resort to taking out a second loan at another store in order to repay the first one. This can lead to a “circle of debt” where a loan of a few hundred dollars can balloon into several thousand dollars within a few months.

Even worse is how these lending places can inadvertently harm other businesses. Because these stores do not run credit checks on their customers, more traditional lenders, such as banks and credit unions, are not aware of any outstanding payday loans held by people who come to them for more traditional financing. If a bank issues a car loan to someone who has ten outstanding payday loans, they may not realize that their new customer represents a huge risk. Often, these customers find themselves unable to repay either the payday loans or the traditional loans, leaving all the lenders in a bind.

Some states are beginning to implement a statewide database of lenders and loans in order to prevent customers from taking out loans from more than one cash advance lender at a time. This would be a good step, as it is only reasonable that any business that wishes to lend money know ahead of time just how indebted their potential customers might be. It would also help the customers avoid becoming trapped in a cycle of debt that is very hard to break.