Payday Loans vs. Credit Cards
Payday Loans vs. Credit Cards - which are worse to take out cash from? They both have their pros and cons (mainly cons) but if you were in a bind and had to pick one, which would it be?This debate popped up during my coffee meet up w/ James from Dinks Finance last night (I told you I'd be blogging about it! haha...). BUT, the crazy thing here was that we found ourselves defending opposite sides! He was slamming credit cards, and I was quick to diss those damn payday loans. It was an epic battle of two finance bloggers going head to head ;) Or perhaps a battle of nerds sipping coffee, take your pick.
The question we have to ask ourselves here though, of course, is who's right? Or better yet, which product technically IS the worst of the two? Well, I'm no expert in the field, but this little quote found on the CFA's (Consumer Federations of America) website says it all:
"Payday loans are extremely expensive compared to other cash loans. A $300 cash advance on the average credit card, repaid in one month, would cost $13.99 finance charge and an annual interest rate of almost 57%. By comparison, a payday loan costing $17.50 per $100 for the same $300 would cost $105 if renewed one time or 426% annual interest."Ca-ching! They also share a pretty interesting cost comparison chart (pdf) and loan calculator that helps to determine what your total costs would be. By the way, for those who aren't familiar with the term "payday loan", it's basically a small short-term loan that's intended to cover a borrower's expenses until their next payday, sorta like a cash advance (also referred to as a paycheck advance or payday advance). They can be taken out online or at physical stores like pawn shops or their own entities.
In fact, it goes without saying that NEITHER payday loans or credit cards are a good answer for getting cash. Borrowing money from family/friends, taking out a personal loan, or just dipping into your savings accounts always trump cash advances when it comes to the fees you'll have to pay. Unfortunately there are times when these aren't an option though - and thus, the reason for this post (other than to prove my man James wrong ;) )
Contender #1: Payday Loans
The average fee you'll pay for a payday loan is somewhere between $17-$25 for each $100 that you take out, but it can get as high as $30 per $100 in some states! So, say you take out a common advance of $500 and you pay it back in full after 2 weeks - GREAT! You had to pay an extra $87.50 on top of the $500 you borrowed, but at least it's over with, right? Unfortunately no, the odds are stacked against you. According to the CFA - "Consumers have an average of eight to thirteen loans per year at a single lender." That's pretty damn scary.
On the plus side, you could argue that since these are mini loans of 2 weeks at a time, it might be easier to pay off and not have it drag on like it may w/ a credit card. That all comes down to personal preference and usage though - I can't really relate to it here.
Then, of course, we have that big ol' stereotype that payday lenders are bad evil people and are out to steal your money! Well, I don't have any facts myself to to say they're shady (although I feel they are), but I can def. say without a doubt that they want your money ;) And unfortunately you're hard pressed to see *all* their fees upfront and readily accessible on their sites - at least on the non-reputable ones.
Contender #2: Credit Cards (cash advances from)
Now let's talk credit cards. As much as I champion my dear credit card for budgeting purposes and the cash back rewards (not to mention the free grace periods to pay back purchases), they're certainly no angels either. According to common knowledge" and the talking heads on TV, the average American household is in about $8,000 debt. Some feel this is a bit inaccurate, but the fact is that many of us are, indeed, ADDICTED to our credit cards.
And if you're already addicted, why not just slap on a cash advance to it right? *shiver*. While usually LESS than paydays (do your research!) you'll still pay a steep price for it - anywhere from 15-25%. Of course, there's also the problem of mixing and matching normal purchases with cash advances. Most cards, if not all, will use your payments to pay off the lower interest items first (like your purchases), and THEN use it to pay off the higher cash advanced amount. It looks like there may be some new rules in place soon that would get rid of this though.
On the other hand, most credit card companys display all the informaton upfront - the rates, the fees, etc. You might actually have to look for it, but it IS there. And usually written in itty bitty font ;) I believe most c/c statements have it all disclosed on the back, but either way it's easily accessible on your bank's website or by placing a 2 min phone call. If you do your research and check around for the best rates, you might be suprised at what you can find.
The Winner: Credit Cards
In conclusion, they both suck and should be avoided like the plague. BUT, if forced to take one over the other, I'd go with my credit card all the way. I'm comfortable with it, I have a good relationship w/ the bank that issues it (USAA), and I can easily go online and pay the advance off at any point (because I don't carry any other balance. And if I did, I could always take out a new card specifically for this purchase and *then* pay it off online).
Now, if only I could remember the reasons James argued for payday loans ;) I'll have to ping him and get him to respond back here. Although in all honesty I'm scared as that boy's a genius at analyzing! Seriously, have you ever checked out any of his posts? whew.
UPDATE: James from Dinks posting up his rebuttal...although his tune has changed ;)
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PS: If you find yourself in a situation and you need help, PLEASE research RESEARCH research! Spending 30 mins now can save you hundreds of dollars later if you don't know what you're getting yourself into. It's easy for me to state my opinions on the subject based on what I know, and what MY experiences have been over the years, but it's not necessarily the best for *everyone*. Only you know that and can judge the best option for yourself.
Here are some other articles I found while researching:
- Payday Loan vs. Credit Card Interest
- Credit Card Cash Advances Versus Payday Loans
- Why a Payday Loan is Better Than a Credit Card Cash Advance
Labels: credit cards, fast cash, loaning money
posted by J. Money at
11:09 AM
16 Comments:
Interesting analysis.....although I agree with the winner..using credit cards cash advance can be very expensive is the customer does not understand that cash advances are usually paid AFTER lower rate items have been paid off, they may believe they paid off the cash advance but when they really havent........either way I agree stay away from both and RESEARCH!!
I'm surprised there was anything to argue about, because anyone can compute the interest side-by-side and see that credit card cash advances cost less.
I have a cash advance outstanding now with USAA. But the beauty of USAA is that it is at the same rate as other purchases. So while I am carrying a balance and paying interest on it, it's the same as if I had simply made a purchase (other than the fact that there is no grace period at the beginning, but after those days are up, it's neck-and-neck, comparing a cash advance to a purchase.) Also, there is oftentimes a fee for a cash advance but the last time I did this, USAA offered to waive the fee. :oD
Other cards most often charge a higher rate for cash advances than for purchases, and it's true that lower-APR balances have to be paid off first before higher-APR balances (like cash advance) are satisfied.
Still, paying a nosebleed rate (like, say, 29%) annually for a cash advance is better than the several hundred percent charged for payday loans kept out for the same period of time.
@Ray - Yes, VERY true indeed at least for now...Not sure what are rumors or not, but that bill that is trying to pass (or passed?) would allow you to CHOOSE where your payments are applied to in the future. As you can imagine, this would be HUGE!
@444 - Agreed :) Btw, did you know that USAA sponsors this site/blog/forum?: whatsonyourmind.com - looks pretty cool. I'm in talks to be a guest poster over there! I'm really excited about that. Also, I've been seeing a lot more reps over on Twitter now, including a main USAA account as well: @usaa_news. Ya gotta get linked up to that!
Also, forgot to mention a good point Credit Goddess pointed out today on twitter - a lot of people use payday loans because of bad credit! if they don't have access to credit cards, it's payday loans or nothing, right? It's all rather interesting to think about...at least to me ;)
Payday Loan places make me cringe. So sad.
Do you actually believe that anybody taking "payday loans" would be reading this blog??
I think it comes down to a purely fees/interest rate discussion. On the whole, I think it's safe to say that most payday loans are the more expensive than cash advances from credit cards.
However, I have to wonder if you default or make a late payment on a payday loan, does that show on your credit report and is it reflected in your credit score?
If not, I would think that maybe, JUST MAYBE, payday loans are actually cheaper in the long run, if you then qualify for a better mortgage or car loan interest rate because your credit score wasn't dinged for paying a credit card late.
Know what I'm sayin?
Lesser of two evils... A cash advance is cheaper than a payday loan in the short run but what if you never get around to paying off that cash advance you took compared to the payday loan you paid off in short time. Certain people need that kind of deadline a payday loan gives whereas the credit card company feeds off one's inability to pay off debt in the first place. Regardless, both are terrible and reinforces the need to have an emergency fund and the fortitude to pay off credit cards within the grace period.
@dink2sink - same here.
@Anonymous - good point. a guy can hope though!
@Sense - That is a VERY good question, I wonder that same thing myself...I'd venture to guess that the more reputable places would possibly report you to the credit agencies, and then maybe the shadier ones wouldn't? Maybe they'd find "other ways" to make you pay ;)
@StackingCash - great point for sure - I'm a deadline type of guy so in theory knowing i have to pay a loan back in 2 weeks might indeed force me to do so more than the "pay whenever" mentality with credit cards. luckily though, I also HATE debt so I'd pay it back as fast as possible no matter what the deadline was.
You wrote: "A $300 cash advance on the average credit card, repaid in one month, would cost $13.99 finance charge and an annual interest rate of almost 57%. By comparison, a payday loan costing $17.50 per $100 for the same $300 would cost $105 if renewed one time or 426% annual interest."
How can you compare a cash advance repaid in one month with a loan extended to another month? You have to compare the exact same time period? You can't just willy nilly say one month cash advance on credit card vs. 2 month online loan. It's bad math.
Also, you have to take into consideration that folks borrowing short term loans online may not have a credit card to use, nevermind an "average credit card" which I assume means a reasonable interest rate.
Think outside your own little world.
That's actually a direct quote from the Consumer Federations of America, not my own. Feel free to let them know you don't approve here if you'd like.
You're right about the fact that people might not have the option to use a credit card, I didn't think about that until after I posted this up. If you read a few comments down, you'll see I wrote the following, "a lot of people use payday loans because of bad credit! if they don't have access to credit cards, it's payday loans or nothing, right?" It's a valid point for sure.
I work at a credit union and we have many members fall for the payday loan scam. They get so hurt by the fees and nastiness of the employees working there I have actually had a woman cry in front of me. My solution would be to talk to your local credit union and try to get a small personal loan or Line of Credit. We aren't currently borrowing any money but we have a $500 Line of Credit available for emergencies. Great article!
Wonderful advice, thank you! And that's awesome you work at a credit union - working for a financial institution is in my top 5 jobs to do one day...as weird as that sounds.
Payday loans are way too risky and could easily wreck your finances.
There are lenders who specialize in approving bad credit loan and credit card request. Try Personal Loans for Bad Credit
good info
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