Finance Globe
U.S. financial and economic topics from several finance writers.
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(770 words)
Why You Should Avoid a Payday Loan
Statistics for payday loans are mind-blowing. According to the Center for Responsible Lending, the average payday borrower has nine transactions each year and is in payday loan debt for 212 days of the year.
Even though the cost of borrowing a payday loan seems cheap, often $10 for every $100 borrowed, the loans get expensive when they’re not paid off immediately. The CRL cites that flipping a typical $325 payday loan eight times leads to $469 in interest. Typical payday borrowers pay back $793 even though the original loan was just $325.
If you need to borrow money quickly and easily, you probably won’t have to look far. In certain areas of town, you’ll notice payday loan and cash advance businesses on nearly every corner. According to the CRL, there are double the number of payday lending storefronts as Starbucks locations.
The process of getting a payday loan is much easier and faster than a bank loan or credit card, which is one of the things that makes them so attractive. You only need to show a valid driver’s license, a recent paystub, and a post-dated check for the loan amount. No credit check is required. Some stores even have drive-thru windows making it that much easier. Loans typically last from 10 to 14 days.
On the due date, the payday lender will either cash your postdated check or direct debit your bank account for the loan plus fees. You can also make payment in person anytime before the due date.
If you can’t afford to pay back the loan, you can rollover by paying a renewal fee the day before the loan is due. Rolling over basically gives you another 10-14 days to pay back the loan. Many states only allow payday loans to be rolled a certain number of times, but payday stores get around the requirement by having you repay the loan and borrow another. In reality, you just have to show up with the loan balance in cash, pay the fee, and then you’ve effectively repaid the loan and borrowed another one.
Payday loans are a trap. No doubt there are borrowers who believe they can outsmart the system and avoid getting ensnared, but the stats are against you. Odds are that if you take out a payday loan, you’ll have to take out another one and probably repeat the process for several months until you finally pay off the balance. Only 2% of payday loan volume is made up of non-repeat customers.
It’s hard to repay payday loans because they worsen the money problems you’re already having. You borrow the loan because you’re short on cash this month. But, if you repay the loan in two weeks, you’ll be short again. And the higher your loan, the harder it is to payback. Three hundred bucks is a lot to part with at one time. It’s painful and many people simply can’t afford to pay back that much money at once. And payday lenders present a great alternative: pay $30 and you get the loan for two more weeks.
Then, once you’ve experienced how easy it is to borrow the money and how little you have to do for an extension, you’re more likely to take out a second or third payday loan from other stores. Multiple payday loans makes it that much more difficult to finally repay it all.
The best way to avoid the payday loan trap is to never take out a loan at all. Consider other options to cover your short-term needs. For example, borrow from a friend or family member, get a part-time job or do some chores for neighbors, sell some of your electronics or other valuables, or cut some of your high-dollar expenses. Some of these same efforts can help you come up with the money to repay the payday loans you’ve already borrowed.
Some payday lenders offer 90-day payment plans, but you’ll have to ask about this option before the loan is drafted from your account. Another strategy used by blogger Andrea of So Over Debt, is to reduce your loan amount at each renewal period. So, instead of rolling over a $300 loan, you might rollover $275 or $250. Do this enough times and eventually you'll have repaid your loan, slowly but surely.
If you’re not in payday loan debt and you don’t want to be, build an emergency fund. Set aside part of each paycheck, even if it’s just $25 or $50. It adds up and if you ever need the money, it’s there and it’s free. No traps.
Sources: Center for Responsible Lending, MSN Money
Even though the cost of borrowing a payday loan seems cheap, often $10 for every $100 borrowed, the loans get expensive when they’re not paid off immediately. The CRL cites that flipping a typical $325 payday loan eight times leads to $469 in interest. Typical payday borrowers pay back $793 even though the original loan was just $325.
If you need to borrow money quickly and easily, you probably won’t have to look far. In certain areas of town, you’ll notice payday loan and cash advance businesses on nearly every corner. According to the CRL, there are double the number of payday lending storefronts as Starbucks locations.
The process of getting a payday loan is much easier and faster than a bank loan or credit card, which is one of the things that makes them so attractive. You only need to show a valid driver’s license, a recent paystub, and a post-dated check for the loan amount. No credit check is required. Some stores even have drive-thru windows making it that much easier. Loans typically last from 10 to 14 days.
On the due date, the payday lender will either cash your postdated check or direct debit your bank account for the loan plus fees. You can also make payment in person anytime before the due date.
If you can’t afford to pay back the loan, you can rollover by paying a renewal fee the day before the loan is due. Rolling over basically gives you another 10-14 days to pay back the loan. Many states only allow payday loans to be rolled a certain number of times, but payday stores get around the requirement by having you repay the loan and borrow another. In reality, you just have to show up with the loan balance in cash, pay the fee, and then you’ve effectively repaid the loan and borrowed another one.
Payday loans are a trap. No doubt there are borrowers who believe they can outsmart the system and avoid getting ensnared, but the stats are against you. Odds are that if you take out a payday loan, you’ll have to take out another one and probably repeat the process for several months until you finally pay off the balance. Only 2% of payday loan volume is made up of non-repeat customers.
It’s hard to repay payday loans because they worsen the money problems you’re already having. You borrow the loan because you’re short on cash this month. But, if you repay the loan in two weeks, you’ll be short again. And the higher your loan, the harder it is to payback. Three hundred bucks is a lot to part with at one time. It’s painful and many people simply can’t afford to pay back that much money at once. And payday lenders present a great alternative: pay $30 and you get the loan for two more weeks.
Then, once you’ve experienced how easy it is to borrow the money and how little you have to do for an extension, you’re more likely to take out a second or third payday loan from other stores. Multiple payday loans makes it that much more difficult to finally repay it all.
The best way to avoid the payday loan trap is to never take out a loan at all. Consider other options to cover your short-term needs. For example, borrow from a friend or family member, get a part-time job or do some chores for neighbors, sell some of your electronics or other valuables, or cut some of your high-dollar expenses. Some of these same efforts can help you come up with the money to repay the payday loans you’ve already borrowed.
Some payday lenders offer 90-day payment plans, but you’ll have to ask about this option before the loan is drafted from your account. Another strategy used by blogger Andrea of So Over Debt, is to reduce your loan amount at each renewal period. So, instead of rolling over a $300 loan, you might rollover $275 or $250. Do this enough times and eventually you'll have repaid your loan, slowly but surely.
If you’re not in payday loan debt and you don’t want to be, build an emergency fund. Set aside part of each paycheck, even if it’s just $25 or $50. It adds up and if you ever need the money, it’s there and it’s free. No traps.
Sources: Center for Responsible Lending, MSN Money
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