We’ve all heard to stay away from payday loans, but why is that? Why are they so horrible? Should you ever get one? (Spoiler alert: NO)
This post should help clear things up a bit… Though fair warning, you might want to sit your wallet aside so you don’t throw up on it :)
But first, what are payday loans?
According to the Consumer Financial Protection Bureau:
“A payday loan is a short-term loan, generally for $500 or less, that is typically due on your next payday..”
Nothing too crazy yet – lots of people take out loans – however, it’s the *interest rate* typically charged that turn these lenders right into predators screwing millions of Americans:
“The cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on credit cards can range from about 12 percent to 30 percent. “
400%!!! It’s pretty hard to make credit cards look good, but damn – congrats guys.
Now to even worse news… :(
Check out these facts from PaydayLendingFacts.org – a project I recently found through Allied Progress which is a nonprofit aimed against powerful special interests ruining our country. And as you may have guessed – they do not like payday lenders.
Facts payday lenders don’t want you to know about:
- 80% of payday loans are rolled over into new loans within 14 days (!!!)
- 20% of new payday loans cost the borrowers more than the amount borrowed (!!!!!!!)
- Half of all borrowers take out at least 10 sequential loans (!!!!!!!!!!!!!!!)
- An average payday loan claims a third of a borrower’s next pay check
- 60% of payday loans are renewed seven or more times in a row, typically adding a 15% fee for every renewal
- 22% of monthly borrowers, “largely people whose income is from Social Security”, remain in debt for an entire year
Other horrible facts:
- Payday lenders bring in more than $54 BILLION each year lending to 12 MILLION Americans
- They’re known to harass borrowers at work, take money directly out of their bank accounts and even threaten to have them arrested (they’ve also been sued multiple times)
- The lenders get around regulations often by declaring themselves “Credit Service Organizations” or issuing “car title” loans instead
- And, most shockingly, there are nearly as many payday storefronts in America as McDonalds and Starbucks – COMBINED. (I can’t even find enough exclamation points to attach to this one)
It’s all a big mess. Unless, of course, you prioritize profit over people. And places like the CFPB and Allied Progress are trying to combat it to at least halt the growth.
So why do people still take out these loans? Do they not realize how bad they are??
I’m no expert, nor have I ever been in the unfortunate position of needing one of these, but my guess is that people are just doing whatever it takes to get by. Whether through faults of their own or not. If you desperately needed cash and they were the only ones offering you some, would you take it?
Someone once told me there’s no point in talking about this stuff here since the demographic wouldn’t be on a personal finance site, but in the off chance that’s not correct: PLEASE check out some of the alternatives below if you’re here researching them! Maybe you’ll see an option you never knew about?
- The Best Alternatives to Payday Loans via Investopedia
- Think there’s no good alternative to payday loans? Think again. via The Washington Post
- Try this before you turn to a 390 percent payday loan via CNBC
Either way, this garbage needs all the free publicity it can get. And at the very least, let this serve as a reminder to all of us just how lucky we are!! And how powerful being in control of our money is!
Would love to hear real-life stories of anyone who’s taken a payday loan out before? And how it affected your money/life?
I’m feeling dirty just talking about this stuff, so hopefully y’all have some great turn around stories to brighten up the mood ;) Lay ’em on us!
PS: I just typed in “payday loans” into Google and saw there are literally 15 of them within miles of my new house… 15!!
PPS: Here’s a list I put together a while back on the best order to take out money in an emergency, if it helps anyone: The Best Order To Take Out Money. I’d swap the order of a cple of them now, but definitely not the last which was not-surprisingly payday loans.
[Photo by Jason Comely]
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!