Looking For a Payday or Short-Term Loan?
Here’s why you might want to think twice before entering a contract, and what other options you may have available to you.
You see them on almost every corner, often in the older and lower-income areas of many cities: payday lenders and strip mall finance companies. They often share the block and even the same building with smoke shops, rent-to-own stores, or used car dealers that advertise title loans or car-equity loans.
Through a payday lender, whether the corner brick and mortar or an online payday or finance company, you can get the cash almost instantly, up to $500 or more in some places, with no credit check, bad credit, no credit, and even after filing for bankruptcy. They advertise speed and convenience.
Are payday loans a good idea for someone needing cash in a hurry?
Payday loans provide a quick infusion of cash into a household without a credit check and sometimes without employment verification or even a bank account, but they come at extremely high, even predatory levels of interest equivalent to 100% to 700% APR or more.
If a consumer finds themselves in a financially challenging situation, a loan at a 500% or higher interest rate will provide relief for only a very short time, followed by a much worse situation than before.
For many consumers, a “quick & easy” small payday loan, cash advance, or title loan can seem quite tempting. They often think of these loan products as the last resort type of loan, like a loan that you only take out when there’s an emergency expense. However, studies suggest that these same borrowers could avoid these expensive loans by building personal emergency savings, cutting back on household expenses, delaying the payment of some bills, selling possessions, or relying on family members for temporary assistance.
Because these high-fee loans are so easy to qualify for, many borrowers fall for the marketing promises of “quick & easy” money when facing eviction, dealing with a broken appliance, or when about to lose their utility service. The temptation to borrow money at any price overcomes logical options that would require additional time and effort. Too many people believe payday loans and similar borrowing options offer some sort of safety net for periods of financial emergencies.
However, research shows that these expensive lending products contribute to pushing borrowers over the financial cliff where they find it impossible to repay debt after debt after debt (kind of like the Red Skull in Avengers: End Game, but without much possibility of returning to financial life). Preventing personal emergencies with an emergency savings fund will be much less painful and far more effective than any payday loan available.
Can payday loans help if you need money fast?
Payday loans, with annualized interest rates of 400% or more, are more likely to make financial emergencies worse rather than better. With high fees and short repayment terms, these loans typically push borrowers into more new debts used to pay off previous payday loans.
A Close Look at the Largest Payday Lenders in America
Let’s see how a few of the largest short-term lenders in the US pitch their loan products to consumers and compare these promises to the reality their customers are living.
One lender reviewed for this post claims to offer a variety of speedy loans that range from just $50 dollars all the way to $26,000. They tell their site visitors with emergency expenses or who face cash shortfalls that they deposit a loan into their accounts as soon as today! Their website emphasizes the ease, speed, and convenience of their lending processes.
Another high-fee lender, known as a car title lender, provides small loans secured by the borrower’s vehicle pink slip signed over to the lender in case the borrower cannot repay the full loan within the borrowing term (typically 30 days).
The opening pitch on the website notifies the visitors that they will find both car title loans and car title pawn loans here, each with a short approval time and regardless of the visitor’s good or bad credit. Like similar services, this site shows stock images of young people holding cash and wearing big smiles on their faces, suggesting their service is a happy decision that provides relief and solutions to financial problems. The company lists the following benefits of title loans and title pawns:
Same Day Cash
All Credit Accepted
Keep Driving Your Vehicle
Finally, the last payday lender reviewed here claims to be a one-stop money shop, highlighting convenience. Like other lenders, the site stresses a fast solution, saying it takes just five minutes to apply. They offer both payday loans and title loans. Like the other lender noted above, they showcase stock images of smiling people happily displaying generous amounts of cash in hand.
Who Takes out a Payday Loan and Why?
In the United States, on average, 12 million adults take out Payday Loans each year. In fact, the typical borrower takes out eight loans over the course of a year and spends over $500 in interest fees.
According to the studies, payday loan borrowers are most likely to be white women aged 25 to 44 and without a 4-year college degree, or African Americans in general. The typical payday loan borrower earns below $40,000 per year. That’s about one-third below the median household income in the US.
Despite the payday loan industry’s claims to provide emergency funds when needed, most borrowers use these expensive loans to pay for recurring bills like rent or mortgage, groceries, and utilities. These findings imply that instead of offering emergency relief, payday loans take large chunks of fees out of the borrower’s budgets that they would otherwise use to satisfactorily meet their recurring obligations.
Instead of offering a financial backstop as claimed, payday loans become the financial fastball headed straight for the head of their own customers.
The Real Cost of a Payday Loan
Payday loans often charge a percentage or straight dollar amount per every $100 borrowed. For example, if you borrow $500, you will incur a fee of $20 per $100 dollars borrowed for loans advertised with a 20% fee. This means you would need to repay the $500 plus $100 extra in fees for a total of $600 to satisfy the lender, and typically within just two weeks.
The additional fees and interest work out to $7.14 cents extra per day. Although this does not sound like much, it adds up quickly. Consider it as requiring the borrower to work an additional 30 to 60 minutes every day just to repay the fee, in addition to the loan amount.
The annual percentage rate (APR) for this particular example equates to 521.42%, not the confusing 20% fee. The 20% is for a two-week period. To annualize the rate, you will have to divide a year (52 weeks) by the two-week period. 52÷2=26. Then, you multiply the 20% fee by the 26 two-week periods in a year to get: 20×26=520%. To put this in perspective, that amounts to more than 32 times the average interest rate on credit card balances in the US.
Trapped In Payday Loans
Using the example above, it becomes easy to see how an individual can get trapped into paying one payday loan by taking out a second payday loan, turning his or her personal finances into a shell game right from the very beginning. Not only does the borrower continue to require funds to pay for current and future expenses, but they must also now deal with a deficit and have just a few weeks to repay the loan with excessive fees. This provides little time to recover from their original shortfall.
If this borrower took out the average of eight payday loans over the course of a year, she or he would pay around $800 dollars in interest and fees, or 60% more than the amount of the $500 payday loan, and an annualized interest rate of 133%!
Some individuals pay considerably more in fees due to the nature of the payday loan and its inherent ability to trap consumers, even if this does not match the loan’s stated intention. For example, imagine the payday lender rolling over (extending by two weeks) each of the eight loans noted above. Instead of incurring $800 in fees, the borrower would owe the same $500 loan but repay $1,600 over the year’s period, equating to 320% more than the loan’s original amount.
Payday Loan Alternatives
What should a consumer do if they think a payday loan represents their best financial option? Consider the following 9 alternatives:
Family or Friends. Conventional wisdom says that money and family or friends shouldn’t mix. You should certainly never ask to borrow money without formalizing it. Put the loan request in writing, including monthly payments, and any interest you are willing to pay, with an explanation of why you feel you will be able to repay the loan despite your current or recent challenges.
Credit Card Cash Advance: Even though you will start accruing interest immediately at the high rate of 20% to 30% APR, these rates pale in comparison to payday loan fees in many states.
Peer-to-peer: While it can take three or four days to get a loan from online marketplaces like LendingClub.com and Prosper.com, they can often offer a faster turnaround time than banks.
Signature Loan: With interest rates in the upper single digits to mid-teens, signature loans can provide assistance in financial pinches while allowing you to repay the loan over several months if not a year, making the monthly payment much more manageable.
Military Family Assistance: Active duty, guard, and reserve service members may find low-interest or no-interest assistance at their local family readiness center.
Refinance Options: Homeowners and even some who own their own vehicles may find refinancing options helpful in times of financial trouble. Borrowers may be able to refinance to a lower monthly payment or even get cash out of the refinance to address immediate needs. Still, borrowers should exercise caution not to exchange longer-term debt for cash that does not go to the most important financial issues of the moment.
Tribal Resources: Many tribes have financial counselors and advisors available to their members. Many Tribal Services provide emergency assistance in addition to homeownership counseling, housing, and rental assistance, and even home financing.
Paycheck Advance: Many employers have a formal process available to employees to request an advance on their upcoming paycheck. These employers typically limit such advances to a certain number per year or in succession. If your company has an HR department, you can check with your representative to find out whether the company offers advances.
Otherwise, you may need to talk to your boss or to the business owner directly to discuss the possibility.
Either way, be sure to approach them with your plan. Most business owners and HR representatives will be more interested in your plan to get out of your financial difficulties than in how you got into them.
Budget, Adjust and Eliminate: Most people who use a payday loan need money within a matter of a few days or, at most, a couple of weeks. They have a bill due soon and often can’t wait more than a few weeks to pay it.
With some planning, households can either prevent the need for a payday loan or create a path out of the cycle of taking out payday loans every two weeks.
A budget is simply a plan for how you expect to spend your money over the coming month. Despite its simplicity, a budget provides a powerful tool to help you avoid spending on non-priorities and impulses.
When your budget shows that your expenses will likely exceed your income over the coming month, instead of turning to a payday loan, consider one of the following three options: 1) Find a way to earn additional income through side hustles, overtime, or a part-time temporary job, 2) Cut back on or cut out your lowest priority expenses, or 3) do a combination of options 1 and 2.
While selling belongings online, at yard sales, or at pawn shops typically means you only recoup 10% to 25% of its purchase price, it may still help you avoid getting stuck in an ongoing cycle of borrowing ever-increasingly large amounts of money at exorbitant interest rates.
Some Payday lenders willingly work with outside organizations like Money Fit to help their clients repay their debt on terms designed to help them break the cycle of payday loan dependency. Unfortunately, not all payday lenders care as much about their customers.
When it comes to whether the customer can get assistance setting up an affordable repayment plan, it remains entirely up to the payday lender. If you have already taken on a payday loan, determine if the lender offers you any repayment alternatives.
Many states require payday lenders to offer the borrower an alternative repayment plan, such as repaying the loan over a four-month period with no additional fees. Unfortunately, many lenders make such information difficult for their borrowers to find.
Payday Loan Consolidation by Money Fit works with lenders that allow third-party agencies to consolidate multiple payday loans or arrange more affordable loan terms for an individual loan. If you have already taken out a payday loan and need assistance, our certified credit counselors can help identify if a particular payday lender works with payday loan consolidation. The counselor can also help provide educational resources to shed light on how to overcome the need for future payday loans and start building your personal emergency savings so that you can establish greater self-reliance, without the need to pay excessive fees in the future.
Do You Have Questions About Getting a Payday Loan?
If you need more information on whether you should get a payday loan or not, or have any other questions about managing your personal finances, please feel free to comment below or give us a call at 1-800-432-0310.