Financial guru Dave Ramsey has referred to whole life insurance as the middle-class equivalent of payday loans. Payday loans are a trap that exploits the poor and desperate, often keeping them in a never-ending cycle of debt that they cannot afford or break out of. Let’s learn why you should avoid pay day loans at all costs.
Every Other Option Is Cheaper
Payday lenders don’t just charge high interest rates. They have the highest interest rates of any financial product on the market barring the mythical loan shark. They advertise a 15 to 20 percent interest rate per 100 dollars borrowed. However, that is not equal to a 15 percent annual interest rate, where you pay 15 to 20 dollars in interest one year after taking out the loan. They charge you 15 to 20 percent over the life of the loan, and that is one pay period. It is actually 15 to 20 percent interest per month. That’s equal to a more than 500 percent annual interest loan. If you have to roll over the loan, you’ll pay more than 500 dollars to pay off that original 100-dollar loan.
The maximum interest rate payday lenders are allowed to charge vary from state to state. Click here to learn more about how much interest payday lenders charge where you live.
And that doesn’t take the fees and penalties into account.
They Like to Add Extra Charges
Many people look at the interest rate and think it is manageable. If you can’t pay off the loan (and most can’t), then you may be charged a fee for the so-called privilege of rolling over the debt into the next pay period. If you’re late, there will be another fee. Refinancing the loan into an installment loan incurs a fee, too. You could end up paying more in fees servicing the loan than you borrowed, and that’s aside from the sky-high interest rate.
Some lenders load the funds onto a prepaid debit card. That comes with an additional activation fee. You could be hit with a fee for checking your balance, hitting an ATM or calling customer service. And you could see the cash balance dwindle due to monthly fees.
It Traps People in a Cycle of Debt
Payday lenders say you can pay off the loan on your next pay period. Unfortunately, the high interest rate and fees makes that nearly impossible. The vast majority of borrowers have to roll over part or all of the loan into the next pay cycle. Only one in six are able to pay off the loan with their next paycheck. This is an incredible burden, given that sixty percent of borrowers say they struggle to meet their monthly expenses. This is why three quarters of payday loans are taken out by someone who had one before. We would say that this debt trap is one of the reasons why we can call payday loans outright evil. This explains why the average payday borrower is in debt five months out of every twelve. A majority of customers take out a new loan within 2 weeks of paying off their old pay day loan, because they lack the money they need to pay essential expenses. They’re trying to pay the rent, not go to Vegas. Roughly 25 percent of loans are rolled over or re-borrowed nine or more times. In these cases, the person spends five months paying off the loan they used to fix their car or pay an unplanned medical bill.
The Lenders Are Often Dishonest
Payday lenders often require pre-payment in the form of a post-dated check. Others require access to the borrower’s bank account. They will hit the bank account as soon as they think your pay check has deposited, and they may do so even though it hasn’t. This can result in insufficient fund warnings and bounced check fees. Then you’re stuck with steep overdraft fees in addition to payday loan payments. Furthermore, this will hurt your credit score. The worst offenders withdraw money from your account even though you don’t really owe anything.
Many debt collectors are dishonest. That’s why the Federal Trade Commission regularly fields calls about lying debt collectors and aggressive debt collection tactics. These range from calling you at work repeatedly though you asked them not to do so to threatening to call the police for an unpaid bill. Their standard line is that failing to pay your loan is going to result in criminal charges for fraud. No, it is not. Know that payday loans are an unsecured debt, and they cannot take your car, your house or your furniture to pay that debt. And if they cash your check early or they cause your other checks to bounce, you probably haven’t committed check fraud, either.
The most the lender can do is sue you in civil court for the debt. If they win, you may see your wages garnished to pay the debt. However, this takes time. Furthermore, you must receive a letter stating how much you owe, the original debt amount, and to whom the payments must be paid. You can hire an attorney to challenge excessive interest, fees and legal bills that you’re being held responsible for. Ironically, the amount of your paycheck taken via wage garnishment is probably a lot less than what the pay day lender was taking.
They Are Everywhere for Their Profit
An estimated twelve million people use payday loans every year. They generally did business at the 14,348 pay day loan storefronts in the United States that were open across the United States as of 2017. For comparison, there were only 14,027 McDonalds locations. This doesn’t take online payday lenders into account.
This is a nine-billion-dollar business. While the average loan is just under 400 dollars, the average payday lender pays 520 dollars in fees and interest to borrow that 375-dollar loan. This is an incredibly high profit margin, and it explains why you can find a pay day lender in almost every strip center in low-income neighborhoods. They advertise themselves as cash stores and solutions for those who are in dire financial straits. They often offer additional services to lure people in, such as charging a high fee to cash a check at 10 PM for someone who doesn’t want to wait until the bank is open.