When you are just starting your adult life, it is very important that you make the right financial decisions. Too many people go out into the real world without the proper financial education, and without this education, they end up making decisions that affect the rest of their lives.
Overspending on everyday shopping trips, overusing credit cards, and taking out payday loans are just a few of the many common mistakes these young adults make, and they are also mistakes you should avoid. For now, I would like to inform you about the dangers of payday loans specifically and some of the alternative choices you have when you think you need a payday loan.
What is a Payday Loan?
Payday loans, also called cash advances or paycheck advances, are short-term loans (usually about two weeks) that you must repay by the time you get your next paycheck. The lender will charge you a fee plus interest on the amount you borrow, and loan you the money you need. These types of lenders usually don’t require a full credit check, which is why they are so popular with those who have bad credit and a low income. This means that the lender is taking a very large risk when they lend money, which is why payday loans have such high interest rates.
Disadvantages of Payday Loans
Some states have a limit as to how high the annual percentage rate (APR) on these loans can get, and some states don’t allow these types of loans at all. However, some states don’t restrict payday lenders, and the APR could be anywhere from 300% to 900% in some cases. Even credit cards have a better APR than this. While this may be a very easy way to get cash fast, you should be very careful because some people who take out a payday loan could end up paying more in interest than they originally had to borrow in the first place.
When a person takes out a payday loan, they write a check for the amount borrowed plus a fee that will be cashed by the lender on their next payday. If they aren’t able to repay the loan at that time, they can roll over the loan to repay it on the following payday. This is where so many people get into trouble. They continue to roll over the loan because they are unable to get by on what is left over from their paycheck, so the loan amount continues to grow with interest. This vicious cycle continues until the person is forced to take out another payday loan to pay off the first payday loan. This process leads to more debt than the persona can handle, and some are forced to go bankrupt because of their decision to take out a payday loan.
Payday loans don’t help solve the underlying problem that has lead borrowers to their financial state. It simply puts a Band-Aid on the gaping wound that is their financial situation. Instead of making this horrible decision that could affect you for the rest of your life, you should change your financial habits and make better choices for your financial future.
Alternatives to Payday Loans
There are many lower interest alternatives to payday loans. The following are just a few.
- Credit union loans –Your local credit union may offer small, short-term loans to members.
- Small bank loans – Some small banks offer alternatives to those looking into payday loans.
- Advances from employers – Ask your employer for a paycheck advance instead of going to a payday lender who will charge interest.
- Borrowing from family and friends – Don’t let your pride keep you from making the right financial choices, but also make sure you put down in writing exactly what each of you expect from this loan. You don’t want money to ruin a friendship or a family relationship.
- Build up and emergency fund – Every household should have at least six months’ worth of expenses saved up in an emergency fund for those tough financial times. If you don’t have any savings now, find a way to save this money so you can avoid having to take out a payday loan in the future.
- Use your credit cards only for emergencies – If you always have the option to use your credit card, you won’t have to worry about taking out a payday loan. Only use your card for emergencies or when you know you will be able to pay off the balance immediately. Not only will you avoid payday loans, but you will also be able to maintain a good credit score, which will help you in the future.
Photo Credit: B Rosen
The Discussion
Clear and accurate article Elsie. These local 'wall streeters' should never have been allowed to open. They are prey on the less fortunate and have no sense of ethics. They should be illegal in all states and that probably won't happen.
The advice to put away 6 months in savings has been the suggested standard for years. However, with today's rising costs and reduced incomes for most people - that has become a pretty distant goal.
Payday loans have no reason for existence. I know. I used to own Cash2Payday, LLC. When the manger had to be removed I went in myself. Once I realized what the state said was a legal business complete with full banking regulation checks and how it directly affected the people involved - No thanks. I was there one week and shut the doors. Doesn't matter the money that can be made. Doesn't matter that your dealing with less than reputable people. Payday loans destroy their lives. They are loan shark loans preying on the poor. I didn't even try to collect and walked away from over $100K. Guess that's my contribution to the poor most of whom didn't deserve it but I sleep quite well at night.
This is an industry that should be shut down.
2 Replies
So true. If this article doesn't convince you that read the confessions of a former payday advance manager at http://advanceamericaonline.blogspot.com/
As a young adult I am especially pleased to see this great article. This is definitely information that students like me should learn before going out to the real world. Pay Day Loans are indeed dangerous and can sink you into more debt if you are not careful
Elsie, your article is doing a great service to the targeted audience. Hopefully they will heed its advice. One thing you omit is that as they get caught in the cycle, failure to pay can result in garnishment of wages. I can not tell you the number of employees I have had to tell you're not getting a paycheck or your check will not be enough to cover a tank of gas because of garnishment. In today's economy, more older adults are also falling victim.
Amen!
Payday lenders are illegal in North Carolina - since 2007. But they have been lobbying to creep back into business here any way they can ever since, and the law is still unclear on Internet loans. http://www.eliminatepaydayloandebt.net/payday-loan-laws/north-carolina-payday-loan-laws/
One further piece of advice: avoid retailer credit cards. All retail clerks (me included) are required as part of our job to ask customers to apply - and there is often an incentive to do so, like 15% off your purchase. These accounts have sky high interest rates, though. DON'T be tempted.