Avoid Payday Loans at All Costs
If you’re desperate for cash—and many people are these days—a payday loan might seem like a simple solution. But BILLSHARK wants to warn you that, if you opt to go that route, you could find yourself in a financial hole that may take years to climb out of.
As many as 12 million Americans take out payday loans each year, with interest rates as high as 400 percent. The Community Financial Services Association of America reports there are more payday lending storefronts in the U.S. than there are McDonald’s restaurants.
What is a payday loan?
A payday loan is a short-term loan available to borrowers who need cash before their next payday. They tend to average between $500-$1,000, and are available both from storefront businesses and online.
The attraction for those who need cash in a hurry is that these loans are often available literally within minutes, and require no credit check.
Typically, the lender will require that the borrower write a post-dated check to the lender for the amount of the loan plus the interest. The date on the check coincides with the next paycheck deposit so the lender is assured of getting its money back.
Another method may be granting them authorization to electronically debit your bank account, again ensuring they get their money the day you get paid, ahead of other obligations or needs you may have.
Why is this bad?
Not only is the interest rate in the neighborhood of what gangsters have gone to prison for charging, but all the cards are stacked in their favor, due to weak federal and state regulations.
A two-week $500 loan that charges $15 for every $100 you borrow equals an APF of nearly 400 percent. To put this in perspective, some of the highest interest rates on credit cards top out at 25-30 percent.
Finally, because the terms are so strict and the interest rates so high, as many as 76 percent of borrowers end up in an endless cycle of taking out another payday loan to cover the cost of the prior one, according to the Center for Responsible Lending. Borrowers can’t pay their bills or buy groceries once the payday loan has been repaid, so they take out another payday loan, which leaves them in the hole again, leading to another payday loan, and so on.
Stories of those who became trapped in this cycle are legion. By the time these lenders add on interest, late fees, rollover fees, and other such charges, loans that start small can quickly balloon into the thousands.
In one extreme example, in 2013 ProPublica investigated a case involving payday lender AmeriCash Loans, which was suing a single mother for defaulting on a $1,000 loan. Over the course of five years of litigation, her loan continued to accrue interest to the tune of $40,000. (The lender eventually dropped their demands once ProPublica got involved.)
Don’t let this happen to you
While there are reportedly a few legitimate payday lenders, they are few and far between, so our recommendation is that you avoid them entirely.
Here’s what to do instead, if you find yourself strapped for quick cash.
1. Borrow Elsewhere
Borrowing from anyone but these shady characters is a far better option.
- Ask family or friends for money.
- See if the terms of your retirement account will let you take out a loan or make a hardship withdrawal.
- If you can join a credit union, they may have low-interest personal loans available.
- If you’re employed, ask if you can get an advance on your paycheck.
- As a last resort, borrow from your credit cards if you have an available credit line. But be warned: The typical cash advance rate is currently around 25 percent, plus a one-time fee up front. This is costly money, so use it only in desperate circumstances.
Do you have any items around the house you can sell? Even if you can’t part with your electronics, what about clothes you or your children never wear? Old furniture? Toys? Kitchen or garden items? If you own it, go on eBay, Craigslist, or Etsy and see if someone wants to buy it.
Remember the old saying, one man’s trash is another man’s treasure. Right now on eBay, for example, empty paper towel and toilet paper rolls are going for between $5 and $25 dollars for batches of about 30.
One other way to get extra cash is to let BILLSHARK review your bills. We charge absolutely nothing unless we are able to save you money, so contact us today and let us find you hidden savings.