Payday Loans: What they are and why they’re problematic
Life certainly has its ups and downs and most people will at some time find themselves very short of cash. If this happens and you’re without a financial cushion, every mistake, unexpected problem or minor life change can quickly turn into a financial disaster. That’s when many people may fall for the lure of a payday loan.
What is a payday loan?
A payday loan is a short-term loan, generally for $500 or less, that is typically due on your next payday. They are also known as cash advance loans, post-dated check loans, check advance loans or deferred deposit loans. The loan is a cash advance secured by the borrower’s personal check and was designed for people who need quick money before their next paycheck arrives. Payday loans are advertised as a quick and easy solution to a temporary cash flow problem. In reality, for most borrowers, the payday lending experience rarely ends up being easy or temporary!
What’s the process for getting a payday loan?
The borrower writes a postdated personal check made payable to the lender for the amount of money they want to borrow, plus the added fee they must pay for borrowing. The lending company gives the borrower the amount of the loan less their fee and agrees to hold the borrowers postdated check until the loan is due, usually at the borrower’s next payday. At that time the lender will deposit that check into their lender account.
Who’s using these loans?
In most cases, anyone with a checking account and a steady income can obtain a payday loan. However, it’s common for borrowers who don’t have access to credit cards or savings accounts to use this type of lender. Since these loans don’t require a credit check, people with no credit or credit problems often turn to payday loans. According to the Consumer Financial Protection Bureau, borrowers who use these loans can often be overwhelmed by fees and can get trapped into a cycle of debt. They found that about 80 percent of payday loans are rolled over into a repeat loan, causing fees to pile up for borrowers.
How much do these loans cost?
Here’s where problems can arise. The cost of the loan may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%!
Payday loans have filled a niche for many people in need of short-term cash but as you can see it’s a very expensive choice. Rather than falling for the lure of these flashy advertisements, choose one or more of these alternatives to help get you through a rough financial patch.
Alternatives to payday loans:
- If your employer offers direct deposit, you can make automatic deposits into your savings account. By doing this you probably won’t notice the difference, but you will have funds available when you really need them.
- Contact your creditors if you are having problems making your payments and ask for more time or try to negotiate a payment plan with them.
- Hawaii State FCU members have access to Money Management International (MMI), a free and confidential credit counseling service. In addition to budget and credit counseling, and credit report review, they offer debt management plans at no cost to HSFCU members.
- Apply for a small personal loan at a credit union. Credit unions pass on the savings from their not-for-profit status through their entire product line, offering customers higher rates on savings accounts and lower rates on loans and credit cards.
- Get a cash advance from your credit card; the interest you pay will be substantially less.
- Ask for an advance from your employer.
- Use your credit unions overdraft protection feature.
- Ask a relative to lend you money.
- In dire circumstances, even pawn shop loans are better than payday loans. They are cheaper and unlike payday loans, there is an exit strategy if the borrower can’t repay. The lender will keep the pawned item and the borrower walks away owing nothing further.
Want a little more help? Check out our eLearning module on PAYDAY LOANS.