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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)
Not only that, but people often get trapped in the cycle when the payment comes due on the next payday. Trends show that the average borrower takes up to five months to repay the loan. If a person is unable to pay back the loan at the next payday, the amount is rolled over until the next payday for a fee.
For a loan of $375, this means paying up to and sometimes more than $520 in finance charges, and that’s not including any NSF fees charged by your bank for any missed payments.
As an additional financial punch in the gut, a person’s likely already-damaged credit score can take another hit from the payday loan cycle. Your credit score takes into account the source of the debt as well as whether or not you make payments on time against that debt or pay it off completely.
Payday loans are not considered to be loans from a reputable lender, such as a loan you would get from the bank for a car. If you’re a frequent user of payday loans and find yourself rolling over those loans repeatedly, it will negatively impact your credit score further.
Sources:
1) How to avoid the payday loan trap. Doell, Linda. MSN Money. Web. Accessed: Sept 22, 2014.
http://money.msn.com/saving-money-tips/post.aspx?post=70949bed-f342-4233-a0f1-edeae36b0508
2) Payday lenders: Small loans, hefty fees, big problem. Consumer Reports.com. Web. Accessed: Sept 22, 2014.
http://www.consumerreports.org/cro/aboutus/mission/viewpoint/small-loan-big-problems/overview/small-loan-big-trouble-ov.htm
3) Payday Loans: Think Twice Before Entering This Cycle of Debt. Drake, Tom. Canadian Finance Blog. Web. Accessed: Sept 22, 2014.
http://canadianfinanceblog.com/payday-loans
Reviewed September 25, 2014
by Michele Blacksberg RN
Edited by Jody Smith
Add a Comment2 Comments
The problem here is that a lot of people who consider payday loans are those who are not financially secure to begin with. When considering this kind of bad credit loan it is important that you are aware of all the fees, and know you can live without the full repayment amount by your next payday to avoid paying even more money out of your pocket each month.
February 24, 2015 - 4:37pmThis Comment
This is essentially the track some state courts are using to block enforcement of theses loans, generally relying on old usury statutes or cases. However to get one of these loans you generally have to turn over your banking information and agree to autowithdrawal of payments, so the only time legal process becomes an issue is once things have gotten so bad the bank account is empty.
As unsavory as the payday loan industry is there is a market of American society that cannot get typical bank financing or credit and needs these services. If banks would fill the void you would see these companies disappear.
September 30, 2014 - 4:25amThis Comment