Rick Vaughn, Categories: This weekend I happened to notice all the Payday Loan Companies in the area near my home. Thankfully, I never had to use one of these companies but I have always heard nothing but bad things about them so I decided to do some research on my own.
First and Foremost what is a Payday loan?
A payday loan is a small loan (maximum $500-$1,000) that does not require a credit check. Payday loans have short terms and must be paid back quickly, usually within a few pay periods. Payday loans are marketed as a way to help you cover your expenses until your next paycheck. Also called “check cashing”, “payroll advance” and “deferred deposit,” these loans offer a fast way to access money in an emergency. Many payday lenders are not licensed, bonded or regulated by important consumer laws. This last sentence should be a big hint that these are NOT a preferred way to borrow money.
The Good?
Pretty self explanatory; if you’re in a bind and need money quick with no other options, sometimes “you gotta do, what you gotta do”.
The Ugly?
It is extremely important that you repay a payday loan as soon as possible. Many people get into trouble with these types of loans when they are unable to quickly repay the debt. If you can’t repay the loan at the end of the term, you’ll be charged expensive additional fees. It is very costly to be stuck in a payday loan cycle for a long time and can lead to larger financial problems. Payday loans are also much more expensive than other methods of borrowing money. In most cases the annual percentage rate (APR) on a payday loan averages about 400%, but the APR is often as high as 5,000%. A standard credit card has an APR of 12% and a standard loan APR is around 7%. If possible, it is better to use a credit card or tap into your savings in the event of an emergency.
The TRUTH is is this should be a very last option if you need money to cover expenses. I would much rather swallow my pride and ask a relative for the money than deal with 5,000% interest (You thought credit cards were bad?). Not very often will I recommend using a credit card but if you have the option use it here.
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4 Comments until now.
Payday advances are not for everyone, but they do offer a great alternative to bank fees, late charges and reconnect fees. Additionally, sometimes it isn’t about “swollowing pride” and asking relatives for a loan, often relatives are far away or unable to help out, in those cases payday advances are a safe, well regulated alternative.
Payday advance compares favorably to many consumer alternatives, even when expressed as annual percentage rates for two-week terms: $100 payday advance with $15 fee is 391% APR.; $100 bounced check with $54.87 NSF/merchant fee is 1431% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%.
One point worthy of mention here is that payday loans are much cheaper than bouncing a check, having your utilities turned off, or even paying overdraft protection fees. It is interesting how this society has painted credit unions as the bastion of good lending practices and friend of the consumer. However, I just read a report that stated the bulk of credit union fees come from overdraft and bounced check protection programs. It’s easy to pick on the payday lenders, but what responsibility do our depository institutions play into the credit issue? (Hint: The lion’s share)
What a closed minded article. Do you have a problem with banks and the fees that they charge? Have you calculated the APR on a bank fee? A payday loan is a short term loan, with a fee charged to borrow the money……
Ask the customers, that use the service to avoid paying the ridiculous bank and credit union fees, and they will tell you they not only need payday loans, but are much better off because of them. Take a look at the increase in bankruptcies in Georgia and NC because payday loans are no longer an option.
In a true capitalist economy…..where there is a need for a service, why should the government regulate it out of business?
Please do your homework and truely show both sides of the issue.
Thanks
Obviously, Payday lenders have a place in the market the shear volume of them makes that evident. However, I still see them as a very last resort. Here is why:
For example, just like “Payday Lending Reps” example you may wish to borrow $100 and write the lender a check for $115 to be cashed in say 14 day’s time when you are next paid. In this case, the finance charge on the loan is $15 which doesn’t sound too bad. However the APR is equivalent to 391% which is extortionate. If you continue to roll the loan over which many lenders will allow you to do, the finance charge will rise accordingly. Which is the largest danger and that is passing the buck and making a much bigger debt.
Thank you for your comments.
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