Payday Loans are Just Bad News

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Payday Loans are Just Bad News

If Visa offered you a credit card with an annual percentage rate of 391%, would you take it?

It sounds like a joke, but to the recipients of one of the most sinister and underhanded lending practices in the marketplace, it's truly no laughing matter.

The typical story goes something like this. Jim is strapped for cash, several of his bills are due (or past due), and payday isn't for another week. So rather than get hit with late fees or hurt his credit any worse than it already is, Jim decides to seek out what is known as a payday loan. He figures, "it's just like an advance on money that's coming my way anyway, right? Why not?"

So Jim takes a walk to his local payday loan center and writes a postdated check for $575 for a $500 loan. Two weeks from now, he'll have to allow the check to be cashed, pay back the full amount of the check by some other means (such as cash), or pay another fee to extend the loan.

Can you guess what $75 on a two-week loan for $500 works out to be in annual interest? That's right, 391% APR-- and what's worse, that's actually the low end of the spectrum when it comes to these types of loans. Payday loans have been known to reach upwards of 700+% APR (often the highest rates come from online lenders) with averages usually in the four to five hundreds. As an example, California's average is 460%.

Once is Rarely Enough

If Jim only had to do this kind of thing once, it might be painful but at least it would be over quickly. The problem, however, is that using this kind of loan often creates a cycle of debt that can't be easily undone. The average borrower spends $793 to pay off a $325 loan because he or she ends up needing to take out more payday loans just to pay off the original, either because of a lack of funds available or because two weeks just isn't enough time to regroup.

According to the Washington State Department of Financial Institutions, one in four payday borrowers in that state took out loans between 10 and 19 times a year.

The Very Definition of Usury

Payday loans often fall directly under the definition of usury, which is the act of lending money at an unreasonably high interest rate, as dictated by the state. Now, of course, many states have allowed payday loans, or payday lenders have used lending loopholes to their advantage, but certainly a loan with an APR in the three-digit realm can't be considered anything except "unreasonable."

As an interesting point of reference, the Roman Empire had a 12% cap on interest rates. The ancient Chinese had a 36% cap. The American colonies had caps between five and 12%. And between 1900 and the late 1970's, most U.S. states had usury caps between 18 and 42%. So historically we are way over the limit and into what amounts to legalized loan sharking.

What Choice Do You Have?

The argument for payday loans is that they serve competition and may be the only alternative for people with severe credit problems. For those people, these loans could be the only thing standing in the way of bouncing checks or having to pawn their personal items. But if you know someone like Jim or have been tempted to take out a payday loan yourself, consider these alternatives:

  • A small loan from your credit union or small loan company.
  • A loan from family or friends.
  • An advance on pay from your employer.
  • A cash advance on a credit card (though it may have a higher interest rate than your other sources of funds).
  • A local, community-based organization may make small business loans to individuals.
  • Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge, or a higher annual interest rate.
  • Try working out a debt repayment plan with creditors and developing a budget.
  • Find out if you have, or can get, overdraft protection on your checking account. The fees can be high but may still be lower than those of payday loans.
  • Contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers and these services are available at little or no cost.
  • Your employer, credit union, or housing authority may also offer credit counseling programs.

No matter what you choose, it's extremely important to shop carefully, compare offers, and look for the option with the lowest APR.

Buyers Beware

Between 2000 and 2004, the number of payday lender locations skyrocketed from 10,000 to 22,000. As of last month, University of Utah law professor Christopher Peterson said, nationally, there are now more payday lenders than McDonalds, Burger King, J.C. Penneys and Target stores combined.

The numbers are scary and several consumer watchdog organizations have released strong warnings against payday loans. The FTC posted a "Consumer Alert," the Consumer Federation of America set up www.paydayloaninfo.org as an educational resource, the United States Defense Department has a program in place that warns military service personnel against them, and our nation's capitol has effectively outlawed the practice by capping the interest rate at 24% (Payday Loan Consumer Protection Act).

The moral of the story? Stay away from payday loans. No matter how bad your financial troubles may seem now, they can always be worse.

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All Comments

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1 Contribution
1 Person Helped

Helpful to 1 out of 1 people

Id rather take a loan from Strongarm Finance Co. If you pay THEM back, they'll just kill you as an example to others.  Use a payday loan and they won't let you off so easy.

1 Contribution
5 People Helped

Helpful to 5 out of 8 people

I WOULD RATHER STEAL AND RISK ARREST THAN DO THIS! TERRIBLE! STAY AWAY FROM THEM!

2 Contributions
57 People Helped

Helpful to 57 out of 58 people

I think a few people on here are out of touch with reality. First of all, yes, the APR does matter. If it was as simple as only paying $25 to borrow $100 these companies wouldn't be doing such great business. Most people do not borrow just $100. They borrow the maximum that they can (in my state $500). And then they end up not paying it back on the original due date because $125 + the original $500 is hard to come up with. Especially if you had an unexpected expense pop up...which is why most of American's take out payday loans. So that $125 finance charge every two weeks really adds up and takes a huge chunk out of our budgets. Before you know it your $500 loan just cost you $1000+.

So, would you rather pay a $30 late fee or the $100's in finance fees?

Most people only do this as a last option. They have to have the money. It's not likely that EVERYONE who gets a payday doesn't keep good track of their finances. We had to take one out last year. First my husband's place of employment caught on fire so he was out of work for 6 weeks. Even with unemployment benefits he would have only brought home 1/3 of his pay. But we had enough in savings to get us through that. One week after he returned to work I got laid off of my job for "lack of production orders." And again, my unemployment wasn't nearly close to what my bring home was. So, in order to make our mortgage payment a few weeks later, we took out a payday loan. But I did my homework. I found a payday loan that gave us the first "term" finance free. So that $300 we borrowed, plus the fees, cost us $300 to payback.

Another option for people is to go through your bank. When I had a US Bank account they offered "advances" up to $500 and only charged a 10% flat fee. So even if it took us 6 weeks to pay back the $500 our total finance charge was only $50. People just need to do the research before they jump into anything.

1 Contribution
12 People Helped

Helpful to 12 out of 14 people

Payday loans are a necessity some times but people should never go over what they can pay back. If you need to go by until you next paycheck comes you need to do your math. Sometimes if you call the company you can pay half of capital and the interest rate will be less on the second payment. I was force to take one on December and it cost me a big chunk to pay it back but I did. If I have to get another one again I will do just what I need until my paycheck comes. When you have 2 toddlers and most of your family members are out of work you may need to get one small payday loan to eat!

2 Contributions
13 People Helped

Helpful to 13 out of 14 people

Whatever you do, regardless of your circumstances, DO NOT get a payday loan. They helped put me into BK.

2 Contributions
10 People Helped

Helpful to 10 out of 14 people

I have used payday loans for many years one particular reason. There is no hassle involved. I don't have to wait any number of days, I don't get my credit checked, I don't hurt my credit score, and its a necessity at times from odd mishaps that happen in life. If you are aware of what you can afford and handle, then there should be no issues with borrowing from a payday loan business. Like with any money management issue, know your limits!

1 Contribution
3 People Helped

Helpful to 3 out of 4 people

I have used payday loans for years but the reality is you have to know your limits... I understood what i was geting myself into and i never had any problems, but you have just plan ignorant people that don't care about anything at the moment other than getting money in thier hands and never once think about how it is to be paid back... Those are the fools..

2 Contributions
3 People Helped

I agree with Midnight Voic

Helpful to 3 out of 3 people

And worse yet if you make some payments against a deposit you have made the same day the payment can clear the babk first and cause an overdraft fee of $30.00 plus on as little as a few cent overdraft

2 Contributions
3 People Helped

Helpful to 1 out of 1 people

Here in Ohio we passed a law last November to cut the interest rate on the most popular payday loans WAY down. They can still finangle ridiculous fees and things with a few remaining loopholes but most people will not get those kinds of loans. The payday cash industry went ballistic when the referendum went on the ballot and threatened to pull out of the state (only they phrased it as "will not be able to operate our businesses under the new law"--yeah right, "unable," my rear end), but so far I'm still seeing them around town. If a lender couldn't make money on 20 or 30 percent interest then credit cards would have tanked as a business model a LONG time ago.

Top Contributor
10 Contributions
46 People Helped

Helpful to 1 out of 1 people

There really needs to be a cap placed on these type of loans, as these companies are truly taking advantage of those who can least afford it. 20% seems most reasonable to me; but at the most 30% interest should be the legal cap. No wonder these places are popping up everywhere... what's next? these lenders holding a ballbat knocking on the door to collect???

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