It is far too easy to get into debt as a teenager.  This isn’t to say that credit cards or car loans or payday loans are bad things even for teenagers; they all serve their purpose and can be extremely helpful.  But young people especially need to understand the dangers of debt.  Here are a few of my recommendations:

• Get them a credit card – “What!?” you say, “you just said we want to keep them out of debt not get them into it.”  Exactly.  They need to understand how to handle a credit card.  Get them one with an extremely low limit and let them buy gas, groceries, etc with it and teach them to PAY OFF THE ENTIRE BALANCE each month.  It will build their credit and teach them of the dangers of credit card debt.
• If you’re going to get them a car, get them a crappy used one – Many young people get into debt because of a sense of entitlement, i.e. “My parents had a nice car and house and I want one too.”  They don’t understand that it took you 15-20 years to what what you have now.  They need to get used to living with less, and later, when they’re more financially stable and independent, they can buy themselves a nice car.
• Have them take a financial literacy course – Many school’s don’t have a financial literacy course (the lack of which is hugely idiotic; it should be required to graduate high-school), but there are simple and free online courses.

Those are just a few tips to get your children on the right track.  Odds are, if you’re reading this your already teaching them to live life with a sound financial footing, so good job.  Soon enough they’ll be 40, rich, and lending money out to much less financially stable friends.

Credit is a simple thing to understand. For whatever reason, it is almost completely avoided in schools and practically never taught at all. Our liberal education system feels its more important for kids to understand arts, poetry and other useless skills and information. So if you, like me, didn’t learn about credit in school and had to learn it on your own, or still need to learn it, here’s a summary.

APR stands for Annual Percentage Rate. When you receive credit, you are given a certain amount of money from a lender. That lender then charges you to borrow the money. Of course, it would defeat the purpose if the money was charge up front. So payment plans are available in which borrowers pay back what they owe in small steps. The APR determines how much the fee is going to be. The term is how long the loan will be out, or the time you have to pay it back.

Now the big thing here is the term. APR doesn’t mean much if the term is one day. You have to know how long the term will be. Hence the phrase ‘short-term credit.’ This means credit extended for a very short period of time.

Short-term credit cannot survive on 36% APR. When you do the math, this means that 3% of your loan is collected as a fee per month. Since short-term credit is typically two weeks or so, the interest collected would be 1.5% of the loan amount.

In other words, if you borrow $500 for two weeks, at 36% APR you only have to pay back $507.50 at the end of your loan term. That’s practically free money. You hardly have to pay the lender anything at all to borrow their money for a short period of time.

That’s why Durbin’s bill makes no sense. It effectively shuts down any and all short-term credit, because no one will be able to make money with it. So what happens if you need to pay rent on Monday but don’t get paid until Friday? What happens if your car breaks down and you don’t get paid until next week? What happens when your phone bill is due a week before your next paycheck?

I will tell you what happens. A) Take the late fee on the bills B) Take the bounced check fee C) Take the overdraft fee or D) Cry. You may be surprised to know that all four will happen. Try paying your rent with a bad check. When it bounces, you get that fee, you get the late fee, and if you use a card, replace the bounced check fee with an overdraft fee, the worst fee of all.

So be sure to write to Dick Durbin and thank him for screwing millions of Americans in need of payday loans. Kiss your short-term credit options good bye if this joke of a bill passes.

The answer is no. You’ll find if you dig deep that the lobbyists and consumer advocacy groups trying to ban them are all funded by banks and credit unions. You see, they are in the payday loan business too. The only difference is, what they charge you is considered fees, what a payday lender charges you is considered interest.

Why does that matter? Which sounds worse, you owe me $20 or 400% APR? What if I told you that 400% APR was on a $100 loan for a week. Which one sounds worse and which one is worse? Exactly…

Banks know there is big business in short term loans. They want it all for themselves. They’ll spread every lie imaginable to get payday lenders out of business so they can be free to charge what they want how they want.

The central argument is around the APR. Ask yourself, do you measure your shoe size in kilometers? No? Why not? Because the size of a shoe is better scaled to centimeters maybe?

So why measure a ten day loan in ANNUAL percentage rate? Why not look at the daily percentage rate? At 400% APR, a payday loan would cost you just over 1% per day. After 10 days, you pay somewhere around 11% in interest. It’s all about context.

Now, if you don’t pay back a payday loan quickly, the interest can increase quickly. That’s why you borrow responsibly. Don’t borrow more than you can pay back. Don’t take out multiple loans at the same time. Be smart about what you’re doing.

As always, lawmakers feel it is the government’s job to dictate to us what is good for us and what isn’t. Oh please…

I’ve got kitchen knives that could do great harm if not used properly, should we ban them? I could squirt a lemon in my eye and hurt myself, should lemons be outlawed? I can lose my life savings in Vegas, should the city be shut down?

Likewise, you can borrow like an idiot and take way too much money and do it from multiple lenders. Or you can borrow responsibly and only get what you can pay back by next payday. It’s on ourselves to be educated and informed about the decisions we make.

But government gets bigger and bigger and runs more and more aspects of our lives. We stand idly by and watch as more people get put out of business and more freedoms are taken away from us. When will enough be enough?

Marion and Herb Sandler, founders of the Center for Responsible Lending, made Time Magazine’s list of 25 people to blame for the financial crisis. How you ask? They owned a bank in the 1980′s that started to do some tricky, shady loans called option ARM. Well they sold this bank to Wachovia in 2006 (for a mere $2.6 billion by the way) and Wachovia shortly imploded. Why? From the massive losses of their bad loans from the bad portfolio they purchased from these people.

Marion and Herb Sandler, founders of CRL

So these swindlers make off like bandits and we all suffer as a result. Now they have their Center for Responsible Lending. Who is in their sights? Payday lenders. And they spew the same verbal diarrhea as everyone else why payday lenders are bad. Well, can we really trust anything they say? After all, they are one of the primary culprits in our financial crisis.

Don’t listen to these crazy people. Never take advice from people who can’t live it. And never think anyone is trustworthy or reliable when they are some of the top 25 people responsible for the financial meltdown in this country.

What I can’t understand is the mindset behind this. Lawmakers feel payday loans are dangerous and hurting people. Well, first time borrowers have a national default rate of about 40%. So 60% of first time payday loan borrowers pay their loan back on the due date without any problem whatsoever. Of repeat borrowers, some states have default rates as low as 12%. That means someone coming back for another payday loan pays it back on the due date just fine 88% of the time.

With these kinds of statistics, how is anyone justified in thinking these loans are ripping people off? The vast majority of borrowers, first time and repeat together, pay their loan back on the due date just fine. Clearly the issue here doesn’t lie with payday loans, it lies with the borrowers.

So why do some borrowers default? Typically, they simply borrow too much. They get multiple outstanding loans and dig themselves into a hole of debt that is virtually impossible to crawl out of. Fortunately, law makers already decided that interest stops growing after 12 weeks. So even if you do get in the hole, it won’t keep getting deeper like credit card debt. it stops after three months.

The funny thing is that legislators are citing extreme, isolated cases in making their arguments. So-and-so had 4 loans for $400 and ended up paying $4,000 back in fees and interest! This is outrageous, they must be banned! This is the kind of rhetoric you would hear during these discussions.

The truth is that a home mortgage will cost you about 10 times more than a payday loan in interest. If you get a payday loan today and get paid again in two weeks, then you would have a 14 days term. At 365% APR, that means 1% in interest every day. So in 14 days, you end up paying how much in interest? Just 14% of the loan, or if you borrowed $300, you pay back $342.

Does that sound predatory or dangerous to you? The danger comes in borrowing $300 from 3 different lenders at once when you only make $500 every two weeks. That’s called idiotic borrowing, not predatory lending.

Look at a home mortgage. Buy a house for $111,000. You put down $11,000 and are left with $100,000 in the loan. If you get a 30 year mortgage for 6% APR, you will end up paying 6% of your balance each year. After 30 years, you will have borrowed $100,000, but paid the bank $216,000! That’s called 116% in interest!

So let me get this straight, its ok to collect double what you lend as long as it is conveniently spaced out over 30 years? But it’s not ok to collect 14% of what you lend in two weeks? Do politicians think logically?

Of course not, their lobbyists do all their thinking for them. And guess who has pumped literally millions of dollars into lobbying politicians against payday loans? Banks and credit unions. Why? Because they would love to corner the market on short-term credit. Then they can charge 1000% APR and simply call it a “fee” and not interest and get away with it. We can fall for illogical rhetoric or we can think for ourselves. Hopefully our politicians do the latter.

Rather than regulate lenders per se, their regulations target borrowers. A bill just passed in South Carolina that would prohibit borrowers from receiving more than one payday loan at once. Why is this a good thing you ask? Simple, too many people were taking too many loans and getting into too much debt, just to blame it on high APR and not their own stupidity.

Let me explain: Most payday lenders will allow you to borrow up to 35% of your income. Most will never give you more than this, as they know your tendency to default will greatly increase after that point. But nothing stops you from going next door to another payday lender and getting 35% of your income there. And then doing it again, and again, and again. The problem? Eventually you’re saddled up with plenty of cash…and plenty of debt that you can’t pay back, as you borrowed well over what you make from a single paycheck.

Now, a state wide database will alert lenders if a potential borrower already has a payday loan out elsewhere. This is great, regulate the borrowers, not the lenders. They’re the real problem anyway. Now no one can go spiraling into debt because they borrowed 200% of their income at 400% APR. Hopefully this paves the way for similar legislation in all the states.

The problem is that people do not understand payday loans. And what they do not understand they fear. There is nothing to be afraid of; the process is really quite simple.

Payday loans are short term loans. Term is the time a loan is out. So the time you have the loan is very short. To account for this, the interest is very high. Imagine having a loan at 20% APR for only a week. What would that cost you, three cents?

Payday loans, when used responsibly, can be very helpful. Those who abuse them are those who feel abused by them. Only borrow what you can pay back with your next paycheck. Then you never have to worry.

Taxis have often been criticized for the extremely high rates. After all, you can ride a bus for a few hours for only a couple of dollars. A quick taxi ride a few blocks goes for $6 or more. Plus your taxi fare is very complicated. Rates change depending on how fast the driver is going. You pay more when they sit in traffic. If you go farther, rates can increase per mile. It is very difficult to figure out.

Why the comparison? Because law restricts the number of taxis that are allowed on the road in any given area. But guess what? The restrictions had nothing to do with “predatory” rates. People wanted to cut down on the noise, traffic and pollution of so many taxis.

Now let us think about payday loans. A payday loan is not meant to take you into financial security for months. It is designed to be a “quick trip around the block” so to speak. Yes, the interest rates are high. But that is because you are not in the taxi for very long. A payday loan is designed to be paid back on your next padyay. That is one month, tops. Usually it is around 14 days.

But look at where the comparison dies. People are not trying to restrict payday lending because there are too many, or because payday lenders ruin the landscape or anything like that. The restrictions placed on payday loans are entirely because of the interest rates. Lack of education is the biggest enemy of payday loans.

How much do you think it would cost to ride a taxi from New York City to Boston? That’s about 220 miles, at about $3.00 per mile….you are looking at over $600! It’s cheaper to fly! Cheaper to ride the train! Cheaper to catch the bus! Quick, we have to ban taxis for this absolute OUTRAGE!

So now people cry and whine saying payday loans cost 391% APR. Well so what? Do you plan on taking out a payday loan for an entire year? Then who cares how much it costs per year! Yet this is the “enlightened” point of view of the supposed “experts” on financial counseling.

Payday loans are short-term loans designed to be paid back quickly and to be borrowed in small amounts. Responsible borrowers have been taking advantage of the quick, easy cash they offer. Let’s not let the irresponsible ones spoil it for everyone else.

People have been complaining about payday loans, or cash advances, for a long time now. This prompted my thorough investigation. I will post a common myth about payday loans and then dispel it.

Myth: Payday loans are a ripoff because of their astronomically high rates.

Truth: APR, or annual percentage rate, measures your interest rate in years. A 12% APR means that in one year, you will pay 12% of the amount you borrowed in interest, or 1% every month. So each month, your balance due back that you owe increases by 1%. The APR on payday loans is usually 350% or more. That is crazy high! But think about this- payday loans are designed to have a maximum term of one month. This means you should never borrow a payday loan for longer then 30 days.

Now 350% APR translates to roughly 1% per day. If you have the loan 14-30 days, you will only pay 14-30% of the loan in interest. In other words, it only costs you $50 to borrow $500 for 10 days. Does 14-30% sound like a lot to you? Of course not, but that is the honest truth about payday loans. You will never pay 350% in interest. Laws prevent them from growing interest after three months anyway, so the most you can pay is around 100% in interest, if you are an irresponsible borrower.

Myth: Payday lenders prey on the poor and minorities.

Truth: Does Wal-Mart prey on the poor and minorities? Do flea markets prey on the poor and minorities? Do thrift stores prey on the poor and minorities? These stores sell products designed for the poor, who tend to be minorities in this country. No on in payday lending preys on anyone. They offer a product. This product is nothing a rich person would be interested in. They can just withdraw cash from their accounts. And on the flip side, no poor person is interested in a Ferrari, the product is not priced at their level. A cash advance is something that people short on cash take advantage of. So no, they do not prey on the poor. They offer a service that only people with little cash would need to take advantage of.

Myth: Payday loans are an example of predatory lending.

Truth: You cannot be thrown in jail by a payday lender. Some states essentially don’t require you to even pay them back. With the ridiculous default rate in payday lending it is a wonder they make money at all. The sad thing is, all their rates, fees and rules are clearly posted in their stores. That is the law. Anyone who gets a payday loan knows exactly what they are getting into. So ask yourself this- if someone goes and buys a used DVD that says “No refunds,” and the DVD they take home doesn’t work well, who is at fault? Is it the vendor of damaged goods, or the person who thought it would be a good idea to buy damaged goods? Is this person really being taken advantage of?

And so it is with payday loans. They are a good product that can be used responsibly and to the benefit of the borrower. Then there are those who are not responsible borrowers and don’t take advantage of the benefits, but feel they got taken advantage of. Did they really?