Is a Payday or Short-Term Loan Right For You?
For the unsuspecting borrower, the allure of a “quick & easy” low dollar amount payday, cash advance or title loan can seem quite tempting. They are often thought of as the last resort type of loan; the loan that you only take out when there’s an emergency expense. However, data suggests that their use could be prevented through personal emergency savings or alternative funding sources such as cutting back on expenses, delaying the payment of some bills, selling possessions or relying on friends or family for assistance.
Examining the Largest Payday Lenders in America
Let’s look at how some of the biggest short term lenders in the US pitch their loan products to consumers.
The first lender I reviewed touts it has speedy loans available from just $50 dollars all the way to $26,000. They ask if you have emergency expenses or are short on cash and make mention that you could be funded as soon as today! Their website says their loan process is easy, fast and friendly.
The next payday lender I looked at was a title lender. Essentially, their opening sales pitch is that they give title loans or title pawns with fast approval, even if you have bad credit. The first thing I notice on their site is that they have stock images of young people holding cash and wearing big smiles on their face. The benefit of title loans and title pawns are listed as:
Same Day Cash
All Credit Accepted
Keep Driving Your Vehicle
Finally, the last payday lender I reviewed claims they are the one-stop money shop. Again, the theme is fast, stating it only takes 5 minutes to apply. They offer both payday loans and title loans and similar to the previous business, they showcase stock images of smiling people happily displaying generous amounts of cash in hand.
Who Takes Out A Payday Loan?
In the United States, on average, 12 million adults engage in Payday Loans each year. These borrowers take out eight loans over the course of a year and spend over $500 in interest fees. Payday loan usage is most prevalent with Caucasian women aged 25 - 44, individuals without a 4-year college degree and African Americans in general. Typically, the payday loan borrower earns below $40,000 per year.
What’s The Real Cost of a Payday Loan?
Payday loans often charge a percentage or straight dollar amount per $100 borrowed. For example, if you were to borrow $500 and the fee was $20 per $100 dollars borrowed, you would need to pay back the $500 with an extra $100 for a total of $600 to satisfy the two-week loan. That comes out to $7.14 cents interest per day which may not sound like much but adds up quickly. The annual percentage rate (APR) for this particular example would be 521.42%. To put it into perspective, that’s more than 32 times the average interest rate on credit card balances in the US.
Trapped In A Payday Loan
Using the example above, it’s easy to see how an individual can get trapped into paying one payday loan by using another one. It’s a game of catch-up from the very beginning. Not only is the borrower assumed to be short of funds to pay for existing expenses of their own, now they are in a deficit and have a few weeks to account for the loan and interest amount. This provides little time to recover from their original shortfall.
In the example above, if this borrower were to take on the average of eight payday loans over the course of a year they would have lost around $800 dollars to interest fees. This is a more typical situation. There are individuals that pay considerably more in fees due to the nature of the payday loan and it’s inherent ability to trap consumers, even if that isn’t the stated intention. For example, let’s imagine that the 8 loans above weren’t paid off on time and we’re extended just once each. That would mean that total cost for the short-term ‘convenience’ of these loans would be $1,600 for the year.
Help With Payday Loans
Some Payday lenders are willing to work with an outside organization in helping their clients repay their debt on terms that are designed to help them break the cycle of payday loan dependency. Unfortunately, not all payday lenders are willing to do so. It’s entirely up to the lender. Which is why we recommend that if you do take on a payday loan after reading this information, that you determine if the business you are reviewing does have repayment alternatives.
Many states require payday lenders to offer the borrower an alternative repayment plan, such as repaying the loan over a four-week period with no additional fees. Unfortunately, many lenders withhold such information from their borrowers.
Payday Loan Consolidation by Money Fit works with lenders that allow third-party assistance to consolidate multiple payday loans, or arrange more feasible loan terms for an individual loan. If you are already borrowing and need assistance, our certified credit counselors can help identify if a particular payday lender works with payday loan consolidation. The counselor can also help provide educational resources that can shed light on how to overcome the need for payday loans and start building your personal emergency savings so that you can be better prepared to rely on yourself, without the need to pay severe interest fees in the future.
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