Quick, Easy Cash comes at a High Price
It’s quick, easy, available and doesn’t require a credit check. It’s the payday loan. Payday loans are short term loans supposedly offered to get you through until the next paycheck.
Unfortunately, this convenience can also spell financial disaster by sucking people into a very difficult-to-break cycle caused by astronomical fees.
Companies that offer payday loans present a friendly public appearance. “We can help.”
When you’re struggling to make ends meet between paychecks, it’s tempting to give in to the I-want-it-now culture we live in. Or perhaps it's more I-need-it-now, because you've suddenly been faced with an unexpected medical expense or car repair.
The Facts about Payday Loans
But think about what you normally count on your paycheck for – groceries, gas, etc. If you don’t have the $500 for that car repair now, are you going to be able to afford to sacrifice that amount, plus fees, off your next paycheck?
Let’s take a closer look at this trap.
A recent report by the Pew Charitable Trusts revealed that every year nearly 12 million Americans take out payday loans and the typical borrowers are white females between the ages of 25 and 44 who don’t have a college degree and earn less than $40,000 per year.
Further, over half of those surveyed admitted that they had regular difficulties paying their monthly bills and used payday loan services to pay those bills. (1)
The Payday Loan Trap
What makes payday loans so dangerous is the fee to borrow, or interest. By law in Florida, for example, payday lenders can only charge 10 peercent interest plus a $5-fee for loans between 7-31 days.
The interest rate doesn’t sound like that much, perhaps about as much as a line of credit, but there is a vast difference. The interest applied to a line of credit is 10 percent per year of the loan, not one month.
If that Florida interest rate, for example, is measured out over a full year, that’s nearly 400 percent per year. And Florida is one of the lower states. “Only 15 states have caps below 60% [annual percentage rate].” (2)