Payday Loans: Avoid at all costs!!

This is Delray Credit Counselingís review of ďPaydayĒ Loans. In this piece you will learn everything you could want to know about payday loans. I will take you through what they are, what they cost, how they are used, and, most importantly, why you should never, ever, use one.

Letís start with what a payday loan is. The idea is simple; now and then most people find themselves in a situation where they are a little short on cash. Maybe the car just broke down or your central air decided that the mid-summer was the perfect time to die; whatever the reason you need cash and you need it now. Payday lenders exist to satisfy that need.

Payday loans are very easy to get. Typically the borrower has to provide their contact information, their bank account information, and their employment info. Additionally youíll need a copy of your most recent bank statement and/or your most recent paystub to verify that the information you are providing is accurate. Thatís it, no credit checks, hardly any waiting, itís as simple as could be. To someone who is in desperate need of cash now it sounds like a lifesaver.

It is NOT a lifesaver.

It is a trap.

Letís dive a little deeper into the mechanics behind the payday loans so you can get a better idea of what that short term loan with the low fee will REALLY cost you. Letís say that you need to borrow $500. The payday lender tells you the interest (theyíll usually call that a fee) for that amount would be $50, and you would have to repay it in two weeks. So, you borrow $500 now and in two weeks when you get paid you give the payday lender $550. $50 seems like a fairly small price to pay for the ability to take care of some emergency expense. Hereís the trap: When you pay back that $550 from your next paycheck the paycheck is now short $550! When itís written out like that it seems ridiculously obvious but so many people donít think about that part of it. How exactly are you going to be able to cover this pay periodís expenses when your paycheck is now short $550? Youíll do the only thing you can; youíll take another payday loan to cover the shortage caused by the last payday loan. So now youíre borrowing $550 to make up for what just came out of your paycheck; next paycheck is now short by $600. You take out another payday loan to cover the $600 and now have $650 taken out of the next paycheckÖ See where this is going? Thatís the trap of the payday loan; the instant you take one youíve dug yourself into a hole that is extremely difficult to dig yourself back out of. Month after month you are taking out new payday loans to pay back the previous ones and each time the amount goes up. After a few months of this, youíve paid hundreds of dollars in interest without making so much as a dent in the amount that you owe.

According to a study done by the Pew Charitable Trusts it takes the average borrower five months to dig themselves out of what was supposed to have been just a one or two week loan and in the process they wind up spending $520 in total fees PLUS the original amount borrowed. Nearly half of all payday borrowers only get themselves out of the hole theyíve dug for themselves by getting help from friends and family or using their tax refund.

Payday lenders will often try to make their loans sound cheap by focusing on the amount of the fee and comparing it to the interest rate of a credit card or a personal loan. The pitch goes a little something like this: ďYouíre only spending $50 to borrow $500! Thatís only 10%! Itís way cheaper than a 20% credit card or a 15% personal loan!Ē NO, NO, NO, NO, NO!!! That credit card charges 20% for AN ENTIRE YEAR, not for two weeks. If youíre paying 10% every two weeks you are paying the equivalent of 260% for the year (10% x 26). When you compare apples to apples does an Annual Rate (APR) of 260% still sound cheaper than that 20% credit card or 15% personal loan?

Go back to the example in the beginning, you take out a $500 loan with a $50 fee that is payable in two weeks. Now letís say you are like the average American in the Pew study and it takes you nine months to finally pay it all off with the generous help of friends and family. In that example you would have spent $900 in interest alone to pay for a $500 loan. That cheap and easy payday loan just cost you a total of $1,400!! But, wait, it gets worse! $1,400 is assuming the lender doesnít charge any additional fees for extending the loan each pay period. Almost all of them do.

In 2013, the governmentís Consumer Financial Protection Bureau issued a report on payday lending. In it, the CFPB warned that payday loans are just incredibly expensive debt traps for customers. Payday lenders do not take into account your actual ability to repay the loan. The terms of payday loans give them first claim to any money that goes into your bank account. They do not care if you need that money to eat or pay your rent. In fact, they are hoping you do, that way you are forced to go back to them for another loan.

But, wait, it gets even worse! Many payday lenders, especially the online ones, will ask for your bank account information in order to deposit your loan amount into your checking account and withdraw their payment. You now run the risk of them taking money out of your account that you donít owe. You make think thatís something that happens only once in a while and even then only as a result of an honest mistake, but youíd be wrong. Fraudulent activity by payday lenders is so common that it was one of the motivating factors behind the US Department of Justiceís ďOperation Choke Point,Ē a crackdown on, among other things, banks that are complacent about allowing payday lenders to siphon funds from customer accounts.

Thankfully, there are some alternatives to a payday loan. So before you run to your nearest quick cash store, or provide your bank information to some unknown lender on the internet, here are some things for you to try first:

  • Borrow from friends or family! As the results of the Pew study I mentioned earlier show, this is what nearly half of all payday borrowers wind up doing in the end anyway. Just do it now and save yourself (and the friend or family member you are borrowing from) the hundreds of extra dollars in interest and fees from a payday loan.
  • Work more! Put in some overtime if your company offers it or get a second job if they donít. Canít find a regular second job? Do some side work on your own! There are always options. Check out websites like Fiverr where you can sell simple services to people around the world. Whatever you are good at, there is a market for it.
  • Pawn your stuff! Thatís right, I just told you to get rid of your stuff. Letís be honest, thereís a pretty good chance the reason youíre short on money is because you spent a bit too much to begin with. So sell that PlayStation! You could sell it now and buy it back a few months later after your situation is improved for a fraction of what you would have spent juggling a payday loan.
  • STOP SPENDING MONEY! Go through your budget with a fine-tooth comb and look for any place where you can cut expenses. I can almost guarantee that if you really looked at your spending honestly, you will plenty of places where youíre wasting money. And speaking of budgetsÖ.
  • BUDGET! BUDGET! BUDGET! There is nothing better than a well-constructed budget for keeping you out of situations where you need a payday loan. If you do not have a family budget, get one! If you donít know how check out the articles on budgeting on this site.
  • Talk to your creditors! No one likes having to call a creditor when they find they canít make a payment, but you will be surprised how willing most creditors are to work with you. They donít want to lose money; itís in their best interests to work something out with you rather than risk not getting paid at all.

Borrowing money from a financial institution should always be the option of last resort. Even the cheapest and fairest loans still pose some risk of trapping you in a cycle of debt. But if you absolutely have no other choice here are two ways to borrow money cheaper than a payday loan:

  • Take a cash advance off a credit card. Typically cash advances are very bad things to do, the interest rate is usually very high plus thereís normally an upfront fee ranging between 3 and 5 percent. Still, a $500 cash advance with a 29% interest rate and a 5% upfront fee would wind up costing you around $604 in total if it takes you an entire year to pay it back. That is significantly cheaper that your typical payday loan.
  • Get a personal loan. This one is a bit harder. Since the debacle that was 2008 most of the major banks have stopped offering personal loans. However, some of the smaller local banks and almost all credit unions still offer them. They usually require a fairly high credit score to qualify but if you can get approved youíll find that they are cheaper than the credit card option.

If, after making it all the way to the end of this article, you still think that a pay day loan sounds like a good idea, Iíve got one last concept to introduce you to: Conservatorship. A conservatorship is where a judge gives someone else control over your finances because it is decided that you are too incompetent to manage them yourself. If you still think a payday loan sounds good, this is probably something you will be needing.

The DelrayCC review of PayDay Loans is thumbs down. They are NOT a good option, plain and simple. Find another solution.