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 ;)
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.