within a week of being paid, all the money's gone. You still have bills to pay.
You've scraped and
pinched everywhere you can but there's just not enough to cover what you need. But with nothing in
Savings, no credit cards utilizing, poor credit
What alternative do you have? should you visit the dreaded payday lender?
payday loans also called cash advance loans, are advertised as a short-term relief when you're in a
financial bind
they are meant to be for small amounts, usually up to five hundred dollars which
the consumer intends to repay with their next paycheck
to some it may seem enticing to go this route
for starters the application process is pretty simple. Only requiring an ID proof of income and a bank
account
once the process is finalized, you can get your money the
same day
sounds attractive but to see the real cost we'll have to run the numbers
Paula has a full-time job as a server in a restaurant but a bout of covid forced her to miss several shifts
coupled with the recent increase in gas prices, she's found she doesn't have enough for this month's
rent
with the moratorium on evictions lapsed in her State, she doesn't want to do anything to aggravate
the landlord so she considers taking out a payday loan
it's just 500 she thinks: I should be able to pay that off
She completes the application online, presents the required documents and the funds are deposited
into our bank account within 24 hours
crisis averted
or has it just begun
obtaining a payday loan is easy but the interest rates are high really high like Woody Harrelson High
Paula's lender charges twenty dollars for every hundred dollars borrowed over a 14-day term. That's
an annual percentage rate of around 500 percent
after another lackluster couple of weeks at work, Paula unfortunately only has a hundred and fifty
dollars left over (far from the six hundred dollars she now owes)
when the lender tries to automatically deduct it from her account it triggers a 35 overdraft fee from
her bank
if she pays the 100 of interest on the loan the lender will graciously allow her to roll over the debt for
another two weeks
Paula has already paid 135 dollars in fees and interest and she's not one inch closer to paying back the
loan
it's estimated by the Consumer Financial Protection Bureau that 80 percent of payday borrowers fail
to pay back the loan in full within the 14-day term and that the average loan of 375 dollars takes an
average of five months to pay back by which time the total cost is around a thousand dollars. That's
not including any late fees or overdraft fees or Banks or credit unions may have charged them
payday loans are considered predatory for two main reasons:
Their High interest rates and the fact that they do not practice underwriting
underwriting is the process of an investigating a prospective borrower's finances to verify whether
they will be able to pay back the loan
if you've ever applied for a mortgage or a credit card, you've gone through it but many payday
lenders don't bother with underwriting, it's almost as if they want customers who won't be able to
pay back the loan so that they can track them in a never-ending nightmare of fees and interest
in 2017 the cfpb issued a mandatory underwriting rule that would compel payday lenders to check
whether a borrower could handle a loan before issuing it however the rule was revoked in 2020 under
the Trump Administration
after five months Paula has paid close to a thousand dollars in interest and fees without even making
a dent in the original 500 loan she's starting to realize that this short-term solution has become a
long-term problem
so what can she do?
assuming she's exhausted her options for scrounging up extra cash she could borrow more money
like taking out a personal loan from our credit union or paying off the loan with a credit card
but most people who resort to Payday Loans do so because they can't qualify for other types of credit
or have already maxed out their cards
Paula considers defaulting on the loan after all her credit score is already in the dumps, but if she
thinks the lender will let her off the hook she's dead wrong
payday lenders will refer to delinquent borrowers to collection agencies and even take them to court
over sums as small as a few hundred dollars
they can put a lien on your house or garnish your wages
there is of course the b word : bankruptcy but before she considers that option, Paula should contact
the lender directly and try to negotiate a settlement
lenders would almost always rather get the money directly from the borrower than sell the debt to a
collections agency and they're often willing to settle for as little as half the full amount especially if
Paula mentions that she's considering declaring bankruptcy and in which case they'd get nothing
even if Paula makes it out of this jam she'll undoubtedly wish that she'd never gotten into it in the first
place, payday loans are almost always a bad idea. If you need cash fast: sell some possessions pick up
extra work, borrow from friends and family even take out a new credit card
almost anything else you can do that's legal is preferable to a payday loan
of course keeping a strict budget and having an emergency fund can protect you from even
being in such a vulnerable position
listen we may all find ourselves in a financial bind at some point and borrowing money can be a
lifesaver when unexpected crises arrive but you have to make sure that what you're swimming
toward is an actual Lifesaver and not a shark in Disguise
