Reasons to Avoid Payday Loans
Payday loans, unfortunately, have become a regular occurrence for many struggling families facing mountains of bills and paychecks that can’t all be covered. Even if money is incredibly tight and it seems impossible to save, here’s why you should avoid taking out a payday loan for any reason.
Outrageous Interest Rates
With an average term of two weeks, finance charges on a payday loan range from $10–30 for every $100 borrowed. Payday loan outfits can charge up to 15 percent of the amount being loaned. These fees may not sound that bad if you need $1,000 in a hurry to avoid getting evicted, but when annualized over the relatively tiny sum that you’re receiving, you are paying an extremely usurious rate that can be higher than the amount of the loan itself. Only 18 states and Washington, D.C. have regulations on payday lenders that cap how much interest they are allowed to charge.
Payday loan interest effectively comes out to anywhere from 400–800 percent APR. APR for most credit cards is between 12–30 percent. Based on interest rates alone, cash advances from credit cards are a far more preferable option if you don’t have any savings left. Credit unions and some banks even offer better rates for fixed personal loans, unlike a payday loan or a credit card that will keep racking up a balance.
Your Financial Woes Could Get Worse
Payday loans must be paid back immediately, right when you get your next paycheck. But what if you don’t get that paycheck because you lose your job, or perhaps you or a family member gets sick, and you can’t go to work?
Those high interest rates can cause your debt to spiral out of control and become virtually impossible to pay off, especially if you live in one of the 32 states that does not cap interest rates on payday lenders or regulate them very stringently. It’s common for people who are in deep financial trouble to stack payday loans when something like this happens, which can take a manageable financial calamity and turn it into debt that leaves them permanently trapped. Cash-strapped individuals frequently take out from eight to 13 payday loans per year, with each new loan taken out once the last one has been repaid. The impact this has on your financial and emotional well-being is catastrophic. Payday loan recipients are also twice as likely to file for bankruptcy than people who don’t use them.
If you don’t have access to conventional credit such as loans and credit cards because of poor or no credit, ask a friend or family member if they can lend money to you. If you do not have public benefits available in your area or are ineligible, see if any local charities or houses of worship can help in preventing your eviction or other emergency. All of these options will prevent the unstoppable debt trap that results from taking out a payday loan.
They Frequently Break the Law
Payday lenders go out of their way to dodge regulations because their loans target the financially vulnerable who are not in a position to fight back or research whether their tactics are legal. Because each state individually establishes small loan laws and their own definition of usury, payday loan outfits will frequently operate as “credit service organizations” or other vaguely worded money service businesses that aren’t banks, so they can skirt the authorized loan amounts and interest rates imposed by the law. Sometimes these businesses even operate in states that don’t allow them. And it’s always the borrower who has to pay for the attempts to dodge the law.
Some of these tactics may be legal, but they’re unethical, or they simply cross the line right into illegal territory, particularly for Internet-based payday loan services, in which fraud is even more rampant. The disregard for the law is a slippery slope to other fraudulent tactics by payday loan outfits, such as renewing the loan automatically every payday or threatening legal action under bad check laws. No one likes receiving a threatening letter from a financial institution or attorney, and legal help could be out of reach if you don’t have a lot of money.
Additionally, by slipping voluntary wage assignment clauses into the fine print of the loan agreement, payday lenders sometimes violate federal law by garnishing your wages if you don’t immediately pay back the loan. However, they are legally able to take money directly from your bank account if you allowed access by signing that loan agreement.
Bank Fees Rack Up, and You Could Lose Your Account
If you can’t repay a payday loan, the outfit can hit you for bounced check fees in addition to the ones that your bank already charged if they try to tap into your bank account for payment, and your balance can’t cover it. In addition to the fees, this can damage your credit rating and even force the bank to close your account. It’s very hard to open a bank account again if your credit report shows that you have a record of bounced checks that were used to get payday loans.
Payday loans compound money woes instead of solving them. In the event that you can’t pay back the loan immediately, it’s too easy to end up drowning in debt, which takes just one payday loan, and stacking them makes it even worse. It doesn’t help that there is a lack of regulation for payday loan outfits in a majority of states, which enables them to harass and threaten borrowers. This situation only compounds the stress you’re already under.
It’s very difficult to save in this harsh economic climate, but you must try to make it a habit, even if it’s just a few dollars here and there. Work to build up your credit, so you can have access to credit cards and small loans from banks and credit unions if an emergency strikes. Talking to your creditors about your financial situation may also give you options.
*This article provides broad and general guidelines and does not constitute professional financial or legal advice. You should not use this article as a substitute for your own judgment, and you should consult professional advisers before making any tax, legal, financial planning or investment decisions.
