Payday loans. Not much makes my skin crawl as much as thinking about this topic. I get it. Sometimes people come on hard times and need to get a loan. I have been there. I have maxed out credit cards, written hot checks, borrowed from family and friends, and yes, I have had payday loans before. But these loans can easily become traps that are nearly impossible to escape from. You almost have to chew off your own leg to get out of their grasp. Let me show you why you should avoid payday loans AT ALL COSTS.
(1) What is a Payday Loan?
Although it might be self explanatory, it is worth defining. A payday loan is a loan given to someone that is due the following payday. These are not to be confused with title loans which hold the title of your car, motorcycle, trailer, camper, etc. as collateral for the loan.
Typically this is how it is supposed to work:
Joe needs some extra cash between now and his next payday. He works as an automotive mechanic and makes $300 every two weeks. A few days after he gets paid he runs out of money and needs some more. He goes to the local payday lender and gets a loan for $300 to be repaid on his next payday along with an extra $50.
Doesn’t sound completely horrible, right? Just wait.
Payday loans come with INSANELY high interest rates, high fees, and are (by definition) predatory.
They are loans marketed toward low income people as a quick way to get some cash by only paying a small fee to get out of their financial jam.
But there is a problem. Payday loans do the exact opposite. Only about 14% of people who take out one of these loans can pay it back.
In fact, here are some stats to hopefully make you want to avoid these places at all costs:
- 12 million Americans use them each year
- The average loan is $375 for two weeks with $520 in fees (you read that right)
- 80% of these loans are taken out within two weeks of paying off a previous one
- 69% of these loans are used for regular living expenses
So now that we know what these horrendous products are, let’s get into the nitty-gritty of how you get completely screwed when you take out a payday loan.
(2) Payday Loan Charges
This is where things get really ugly.
Interest Charges
The WORST part about payday loans are the interest rates that they charge.
The typical interest rate on one of these products is around 400%.
Yep. You read that correctly. 400%.
Some states charge as much as 600+%. Here is a map of the average payday loan rates in each state:
These are so bad that several states have enacted laws to limit how much interest that they can charge.
In fact some states have banned them entirely.
If you are in need of some cash, put it on a credit card, borrow it from a friend or family member, get a side hustle, sell your semen. Do whatever you can to avoid these loans!
Fees
If the interest rates weren’t bad enough for you, it gets worse still.
Payday loans typically have fees associated with them. They vary from lender to lender, state to state, and borrower to borrower.
These fees often include:
- A finance charge
- Rollover fees (used when you can’t pay back your loan on time and you need another one to get through)
- Late fees
- Prepaid debit card fees
Yep. Some of the lenders will make the loaned money go onto a prepaid debit card where you are then charged a fee each time you use it. Ridiculous.
(3) The Payday Loan Death Spiral
This is the worst part. The payday loan death spiral is how people get trapped in the payday loan cycle and it can be almost impossible to get out.
Here’s how it works.
Mike goes to get a payday loan. He gets a loan for $300 and is charged $45 for it and it is due back in two weeks.
At the end of two weeks, Mike can’t pay back the loan in its entirety. He can only afford to pay back $100.
So the loan officer offers to lend him another loan to repay his first loan. The second loan is for $200 and he is charged $30 for this loan.
Two weeks after that, Mike can’t pay the loan off and needs to borrow money again and the death spiral continues.
Although this might be a little confusing, the concept is that the borrower has to continually borrow money to get out of the cycle. And each time they incur a new finance charge, more interest, more fees, and more debt.
This is what makes these products so dangerous.
Final Thoughts
I hope I haven’t been unclear. These are horrible products that should be avoided at all costs.
But what if you already have one? Don’t beat yourself up. I’m here for you 🙂
Just do whatever you can to get out of that cycle.
Sell things. Walk to work. Get a second job. Get a side hustle. Do whatever you can to get out.
And if you have to take on debt, borrow it from a friend, get a personal loan at the bank, or even put it on a credit card. It will be far less costly.
We can not get ahead financially if we are paying the crazy interest rates that these places charge and/or are in the payday loan death spiral.
I have made a LOT of financial mistakes in the past as well. Including getting a couple payday loans.
Let’s just work to get better now though.
I am here for you!
You can do this!
Until next time!
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