How about this for a deal…
You’re short on your rent but get paid in a few days. So I lend you the $350 you need, but I’m going to charge you $15 for each $100 you borrow and you have to pay me back, in full, in 2 weeks. But, don’t worry. If you can’t pay it back in time, you can roll the loan over for another two weeks at another $15 fee per $100 borrowed (plus a $25 roll-over fee).
When you’re on a pinch, a $15 fee on $100 might not sound terrible… until you consider it is for only 2 weeks. That’s the equivalent of a 390% annual interest rate. It’s basically legal loan-sharking.
Yes. And it happens to 12 million Americans every year who use payday loans to get out of a tight spot.
But, the real trouble starts when people roll those payday loans over for a second or third time. Or worse, take a larger loan from a second payday lender to pay off the first loan plus any fees they’ve racked up.
In fact, a recent study by the Pew Charitable Trust found that the AVERAGE payday loan borrower takes out 8 loans (each new one probably a little larger than the previous one) and pays a whopping $520 in interest just to borrow that $375.
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Big trouble with PayDay Loans
But 1 in 4 payday loan borrowers gets in really deep trouble, taking out between 10 and 19 loans a year and paying upwards to 700% interest when it’s all said and done.
In other words… if you ain’t got the money to pay the bill today, you ain’t gonna have the cash to pay off the payday loan in two weeks. More than likely, you will get sucked into cycle of using one payday loan to pay off another with no end in sight.
Some states are cracking down on payday lenders. A few have even outlawed physical payday loan stores, but that still leaves room for online payday lenders.
Here’s an interactive map from Pew Charitable Trust you can use to see where your state stands on payday lending laws. (Click the 4-way arrow in the upper right corner to enlarge it)
So, if payday loans are so bad, how are you supposed to keep it together when you come up short? (Especially if you have troubled credit?)
Here are some safer alternatives to payday loans
Ask for a pay advance from your employer – it’s not a loan, so you won’t have to pay fees or interest. Of course, you will have to be careful budgeting because you next paycheck will be smaller than usual.
Work overtime or take on a second job – more money coming in means more money to cover your expenses (and more to put into savings to cover your next emergency!)
Adjust your taxable withholdings – if you set your withholding high so you can get a big tax return, you’re letting the government borrow your money for free. Lower your withholding, keep more of your pay check, and you will have more money to make ends meet.
Borrow from a friend or relative – you may have to swallow your pride, but borrowing from Aunt Betty is way better than getting sharked by a payday loan
Use a credit card – if you can use credit to pay what you owe, it’s better to pay the 15% – 17% interest than the 390% a payday loan will cost
Take out a cash advance on a credit card – if you have to pay in cash, you’ll be charged about 30% for a cash advance on a credit card. It’s expensive, but still way better than 390%.
Bottom line about PayDay Loans
Your best bet is to avoid the situation all together. Spend LESS than you earn. SAVE for emergencies. Tap into that savings when there’s a crisis. (Just be sure to PAY YOURSELF BACK so your savings is there the next time you need it.)
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.