FINANCIAL ADVICE | improving your credit
Why You Should Avoid Payday Loans At All Costs
Published February 8, 2019
Key Takeaways
- You should never use payday loans to get out of a financial jam.
- There are better solutions for people in a financial pinch.
- Finances can be challenging, and most people find themselves in a money pinch from time-to-time.
If you are stranded at sea and have little or no water, you may be tempted to drink seawater. Unfortunately, the salt in the seawater will dehydrate you and kill you even faster than you would have died without any water. That's the metaphor for payday loans. When you're in dire financial circumstances, someone offering you a “quick and easy” loan seems so tempting. However, it's like the seawater and can rapidly land you in much worse financial trouble than you were in originally. That's why you should never use payday loans to get out of a financial jam.
Payday Loans: The Terms
- Bottom line, with a payday loan you pay roughly 400% interest on the money you borrow, compared to an average of 12%-to-30% interest on normal loans.
- Most payday loans are for less than $500, and lenders charge between 10% and 30% for every $100 borrowed. So, if the payday lender lent $500 for two weeks at 15%, a borrower would have to repay the loan on their next payday plus $75.
- Borrowers frequently lack the money to pay the loan back with interest when it comes due, so they roll the loan over into a new loan, and they wind up even more indebted to the payday lender.
- Lenders may require the borrower to leave a signed check for the amount or may get permission to draft money from the borrower's account on the agreed upon date. This has several times lead to massive fraud.
The Not-So-Fine Print
In one case the Federal Trade Commission (FTC) was able to fine payday lender AMG more than $500 million for extra fines and illegal withdrawals from customers' banks. One customer had agreed to pay AMG $390 for a $300 loan, for example. The payday company helped itself to $975. This is only one of several such schemes the FTC has had to prosecute in recent years.
In other cases, the company took out monthly payments for interest on loans already paid back and even used customers' bank accounts for money laundering. The FTC was able to prosecute those cases, but it can only prosecute a fraction of the cases filed. In other words, the fact that you were defrauded may or may not ever result in your money being returned to you.
A Better Solution
There are better solutions for people in a financial pinch. Among those proposed by the FTC include talking to your credit union about a short-term loan. Credit unions work in favor of their members and often offer the best loan rates and terms.
Customers should also consider talking to creditors about their situations. Creditors usually have programs to help customers who are having a difficult time financially. Especially if you're a customer with a good record, they may defer payment, make catch-up arrangements, or offer other remedies. Usually, the cost of being a bit late on a payment is much lower than the cost of a payday loan.
Finances can be challenging, and most people find themselves in a money pinch from time-to-time. However, if it becomes a habit, it's time to get a handle on spending by having an expert help you figure out either how to make ends meet on your current income or look for other solutions. Some companies that offer assistance will actually make things worse while others are there to help.
Just try to get help early in the game, before you wreck your credit, or somebody does it for you. We love to help our members get and stay on top of their finances for their own sense of security and well-being. If we can help you out, contact us today!