It is almost impossible to turn on the television and not see a commercial advertising the convenience of a short-term loan. The large bold print spells “easy” and “a quick fix solution to the unexpected bills” while the fine print tells a different story. Watching the advertisement you have to admit how simple and easy it appears to be to apply and be approved to have funds drafted into your account usually within 24 business hours. But what happens behind the scene and what is the real cost to the borrower?
What is a payday loan?
The quick definition of a payday loan is a short-term loan that is generally used to cover unexpected expenses. These loans are expensive to the borrower and have fees and interest rates (APR) usually in the triple digits (I’ve seen some as high as 756%!). Most loans are due within a two week timeframe, but longer terms are available (of course for an additional fee).
Requirements to obtain a loan have slight variations from lender to lender, but for the most part the borrower must prove they have a regular income (otherwise how will they pay back the loan?) and have a checking or savings account that is in good standing. The income level requirement on a monthly basis is fairly low (~$1,000), and you must be a resident of the state where you are applying for the loan.
After filling out a quick application form, most loan companies will send you an approval status within minutes and the funds are deposited into your account usually the next day.
How Does Payday Loans Work?
Doing quick research I learned that the borrower will write a check for the amount of the loan plus fees and interest, and the lender will hold onto the check until the next pay day. I went on a payday loan site to evaluate the application process and learn about the fees associated with different loan amount increments. As with all lenders, each company is required to spell out the cost of the loan and the terms.
One site had a fee structure that clearly spelled out the interest rate by loan amount for a specific timeframe. As I began to play around the charts I noticed different states had different fees and different allowable loan amounts. This made me dig deeper into the legality of payday loans for each state.
How are consumers protected?
According to Pay Day Loan Info (paydayloaninfo.org) , there are currently 18 states that have caps on the interest rate a lender can charge. The other 32 states allow payday lending, some with no regulation on the interest fee cap. I live in the state of Georgia where payday loans are prohibited (but title loans are allowed). Each state is different and the terms will vary.
How can you steer clear from payday loans?
My research results were eye opening for me, especially knowing so many Americans get trapped in the payday loan cycle. Understanding the reasons why a person would subject themselves to this overtly consumer abuse, I wondered, how can people avoid the payday lender? My first thought, of course, was to build an emergency fund.
Sounds easy, right? Well, studying personal finance and more importantly, speaking to people who really need help in their finances, building an emergency fund is easier said than done. Building a nest egg of $500 sounds daunting at first, but if you break it up into small pieces, it’s really not that bad. Start off small. Even if you save $20/check, that is $20 more every two weeks than you had in the past. Don’t think about how long it will take you to reach $500, because when you think about the whole, you may be tempted to give up.
Have the money direct deposited into a savings account. Don’t even give yourself the opportunity to spend it! Don’t have $20 to spare? I am almost POSTIVE you do! Shave off $5 from four expense categories, and voila, there’s your $20! Example, you have $50/week for food, spend only $45 and put the other $5 aside into savings. Don’t think you can do that? Use coupons on your next grocery trip and I can almost guarantee you can save at least $5! Where there’s a will, there’s a way.
Payday loans are expensive and I would not recommend them. If you find you are always in a financial rut, begin to think about ways to cut your expenses. This is going to be hard at first, but approach it with an open mind. In the long run, your proactive approach to your finances will benefit you more than just in your finances.
I am always eager to hear other’s 2¢ and I welcome your comments/questions/complaints!!
Photo by: taberandrew