When to Use Payday Loans……NEVER!

danger - largeOr, as Taylor Swift might say: “Never, ever, ever.”  During these trying economic times millions of working Americans are facing, payday loans are becoming a common source of short-term financing. This is especially true for low-income families……those folk who can least afford them.  Why?  Because payday loans are easy to get and don’t require any sort of credit check.   They are sort of like the loans that Mafia-funded loan sharks used to provide back in the 50s and 60s.   However, in modern times,   payday loans trap millions of consumers in a cycle of debt from which they can’t escape.  In fact, turning a short-term lack of cash into a chain of unaffordable loans is the core of the payday loan business model.  Finance charges are from 15 to 30 percent of the amount being borrowed. Since it’s 15 to 30 percent on just a few weeks, if’s comparable to getting a loan with an annual percentage rate of nearly 500 percent.  That’s why the Federal Consumer Financial Protection Bureau (CFPB)  has recently set its sights on the payday loan industry.   For payday lenders, the average APR is roughly 320 percent, according to CFPB data.  Worse yet,  the payday loan companies often prey on lower income neighborhoods knowing they are more likely to obtain one of these loans.   This is one of the reasons that recently Google announced that, as with guns, tobacco and explosives, payday loans will officially be banned from Google ads.  The search company stated that it felt that it needed protect users from “deceptive” financial products.”   Duh!

The fact that the loans themselves are for relatively small amounts (usually $100 to $1,000), have such a brief term, and have interest rates that may be expressed as a fee instead of a percentage, disguise the fact that you’re getting the raw end of the deal.  Students who use payday loans to help pay off student loans are doubly damned because there’s almost no way out.

Applying online for a payday loan may seem like the natural thing for a cash-strapped person to do but you could be setting yourself up for a world of hurt, from paying exorbitant interest rates to having funds swiped from your bank account to being threatened by debt collectors. Just filling out an application could be enough to begin the harassment and thievery.  It is absolutely the worst thing you can do is apply for an online payday loan…unless you are considering killing someone, in which case it might be the second worst thing you can do.

How bad are payday loans?  Think of them as the hate-child of Adolph Hitler and Martin Shkreli;  unrestrained greed combined with sociopathy.   People who borrow money against their paychecks are expected to pay it back within two weeks, with substantial fees piled on: A customer who borrows $500 would typically owe around $575, at an annual percentage rate of 391 percent.  Payday lenders in Ohio generally  charge 591 percent interest — among the highest in the nation, according to research by Pew Charitable Trusts, and paying back one of these loans is said to eat up more than one-third of a typical customer’s paycheck. 

Payday Loan Alternatives

There are alternatives to getting a payday loan. Perhaps the best option is to create a budget so that you afford paying your bills. This means you need to set a budget for your basic necessities, including rent, transport, groceries, communications and health care.  You need only  peruse our pages to learn about how to reduce your basic costs.   Your time is probably better spent combing your expenses and looking for ways to cut back rather than getting snared in the payday loan web, where you’ll find yourself taking out another payday loan from another company to cover the first one, or allowing their original loan to roll forward for an additional fee.

Another alternative to a payday loan in the event of an unexpected expense is getting a pay advance on your paycheck from your employer. Many employers offer this to their employees in emergency situations. Employers want to keep good employees happy. While this won’t always work, and you won’t be able to make it a habit, if you are facing a true emergency and bring it up with your employer there’s a good chance you can get some sort of financial assistance.You might even want to consider a pawn shop. Most people have something of value that can be pawned such as old jewelry, tools and electronics that can be used as collateral for a short-term loan from the pawn shop. You get cash for your item and you can still come back and repay the loan and get your item back. If you can’t repay the loan, the pawn shop keeps the item you gave them. So, you ended up basically selling your item to them. This is often a better alternative than getting an unsecured payday loan and being hit with exorbitant fees and finding yourself in a dangerous debt spiral.

While not ideal, credit card advances can also be an alternative to a payday loan. Even though interest rates are applicable with a credit card advance, it can be very helpful for a one-time emergency situation; it’s certainly an improvement over paying 400% percent APR on a payday loan. Finally, asking friends or family for a loan to help get through a hard time is another possibility. Most people have relatives or friends who will loan them money needed to help with unforeseen expenses or emergencies. Little to no interest is usually added to these loans and arrangements can sometimes be made to pay the loan back in installments over time. Of course, the favor may be asked of you someday and money can ruin relationships, so this should also be another last resort.

Ultimately, the only route to liquidity is for your income to exceed your expenses.There are only two ways for that to happen: either you increase your income, or you reduce your expenses. If you want to supercharge your savings, you can do both. Of course, that’s easier said than done. We understand. But, falling into the payday loan trap is not going to solve your money problems and will bring yet additional distress to your already stressed life.   Just don’t go there!

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