More than 12 million Americans take out payday loans every year, and a significant number of these advances go into default. It is estimated that borrowers pay more than nine billion dollars in loan fees and are more susceptible to suffering the snowball effect when accepting the terms of a short-term loan such as a cash advance. Still, many consumers fall prey to the false notion of only needing “a little more cash” to get by.
It is indeed not suggested that anyone accept the lies that payday companies spew to attract them to the toxicity of short-term loans. Still, life happens. People who get payday loans are at risk for becoming locked into a never-ending cycle of debt. Once this happens, they are paying the interest and fees only by “rolling over” their payday loan into another payday loan to give them more time to pay it off. Their balance never goes down, and they feel like there is no way out. We’re going to discuss the ins and outs of payday loans and how to get out from under them.
What are Payday Loans?
Payday loans are quick fixes for people who have no money and need cash fast. But they also tend to loan only small amounts of money, having the borrower sign an agreement to be repaid from the borrower’s next paycheck. The interest rates are usually extremely high on these loans. These payday loans are also referred to as cash advances or check loans. They are mostly offered at $1,000 or less, with that amount plus the interest due on the borrower’s next payday, plus any associated fees. Basically, they are short-term high-interest loans with lots of fees.
There are usually three features that go with taking out payday loans. They are given out in small amounts, always due on the next payday (usually within 14 days) and lenders are typically given access to the borrower’s bank account, giving the lender an option to deposit the check if the borrower does not return to pick it up.
Depending on the payday loan company that is used, loan features can often vary. Some payday loans are structured as if to pay them off in a lump sum payment, but there are also interest-only payments. These payments mean that the borrower brings the complete amount due on his/her next payday, only to renew the loan, pay the interest, and carry the loan over until the next payday.
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There are different ways by which lenders can give the borrowers money. They include giving cash or a check, adding funds to a prepaid debit card and even depositing the funds directly into the borrower’s bank account. Interest added on these loans can go from $10 to $50 for every 100 dollars that are borrowed. Traditionally, the two-week payday loan can reach an annual percentage rate of nearly 800%, with the lowest rate usually being around 400%. This cannot compare to most credit card rates which range from 10 to 26 percent.
How much a borrower can get really depends on the state laws and other factors. Some states do not permit payday loan stores (and for very good reasons), many times because the lenders would rather not have to abide by stricter laws, so they just go to another state where the law is more lenient. State regulations can often drive away or avert lenders from coming and opening a storefront.
Most anyone who wants a payday loan can get one. The only thing a borrower really needs is a steady income and checking account (usually). The typical type of borrower who would use these loans does not have credit cards or savings accounts, so when an emergency happens they tend to rely on payday loans. Payday loans do not require a credit check. Most of these loans can be obtained by people with no credit or bad credit. New immigrants and military personnel often turn to payday loans.
Understand the Nature of a Payday Loan –
A payday loan is not meant to be the remedy for a semi-permanent shortage of funds. A borrower with more bills than money should not seek a short-term loan to fix their issues but should instead consider reducing expenses so that the necessities of life are paid for more easily.
It is equally important to understand that cash advances are not written in favor of the borrower but rather the lender. The average person pays anywhere from $40 to $60 in interest fees on a $250 loan. Borrowers, then, must pay around $300 or more back to the lender to satisfy the terms of the agreement stipulated in the loan’s contract. Since the typical payday advance customer is living from paycheck to paycheck, it is safe to assume that he or she does not have $300+ to spare when it comes time to pay the piper. They usually must borrow again to make up for what the cash advance payment took. Therein begins the vicious cycle of payday loans that many find impossible to break.
Endless Vicious Cycle –
The usual fees and interest on a typical payday loan amount to around $10 to even $50 on every $100 borrowed. If a borrower took out a payday loan for $1,000, he or she would end up paying around $150 for fees and interest, plus the $1,000 that’s already owed. In two weeks, when the loan becomes due, the total amount would be $1,150 or higher depending on the associated fees and interest rate. This is bad, but it gets even worse.
Compounding Interest and Fees –
In order to keep the loan from becoming delinquent, the borrower usually has to get a new loan and pay the $150 all over again. If a borrower cannot pay back the two loans for six months, the total amount paid at the end of that six-month period will be $1,900 and $2,800 in a year. Some people become so ensnared in payday loan debt that they have several payday loans outstanding at the same time. The interest and fees start to get really out of control.
Alternatives to Payday Loans –
In times of financial hardship, many people seek payday loans as a way to get cash immediately. However, payday loans come with steep fees and an average annual percentage rate of around 400-500 percent. Although people usually seek payday loans as a quick-fix to an emergency, they can get hooked on the instant gratification the loan offers and get caught up in a cycle of relying on these loans when there are several other options that may be available to them.
Ask Your Employer for an Advance –
Ask your employer about a paycheck advance. There is a possibility that you may be able to get your paycheck early if you are experiencing financial hardship. Since a paycheck advance isn’t a loan, you won’t be faced with any fees or interest charges. There is certainly no guarantee that your place of employment will be willing or able to offer a paycheck advance, and it is not something to ask for each pay cycle, but in times of temporary hardship, it can’t hurt to ask.
Talk to Friends and Family about a Loan –
If you feel uncomfortable asking your employer for an advance, consider reaching out to friends or family members who may be in a financial position to help you out. Getting a loan from friends or family does not require a credit check, they will likely be much more flexible with repayment terms and they may not even charge you any interest.
Traditional Bank Loans –
For some people, asking friends or family for financial assistance can be a difficult or embarrassing experience. If this is the case, you may want to consider a more traditional loan process. Check with your financial institution to see if they can approve you for a small-dollar loan. These types of loans are often linked to a mandatory savings account, so if you borrow $500, 15 percent of that will be deposited into savings and cannot be touched until the loan is paid back. With a small-dollar loan, not only will you get the cash you need upfront, but it will also help you to establish some much-needed savings.
Debt Management Advice from Professionals –
If you are in need of immediate financial assistance and are considering turning to a payday loan, you likely have a serious financial problem on your hands or will in the near future. Working with a non-profit credit counseling agency like Advantage CCS can help you get your finances under control.
We can help you set up and stick to a budget and manage your debt. We can also work with your creditors to help lower your unsecured debt payments on credit cards, and work out a monthly payment schedule that won’t leave you underwater.
We, unfortunately, cannot assist with payday loan debt because of some state laws and because most payday loan lenders are not willing to work with a credit counseling agency. Most of the time they don’t even want to speak with us. We can, however, assist with your credit card debt, medical debt, and collection agency debt that is unsecured. That could help free up some extra cash that you could put towards paying off your payday loan debt.
Advantage CCS counselors offer valuable information and support on debt reduction, debt management, budgeting, and much more to put you on the right track to establishing financial security without having to resort to a payday loan. Our certified credit counselors are available online, via the telephone, or in person at one of our five locations.
How To Get Out –
Some borrowers think there is no way of escaping the grip of payday loans. There are, however, several ways to break the cycle of indebtedness and subsequent poverty.
First, consumers can seek out advances from lenders associated with the Community Financial Services Association of America (CFSA). Financial institutions that are members of this association are subject to its best practices policy, which allows for extended payment plans (EPP). An EPP gives customers up to four additional pay periods to fulfill the requirements of their loan.
Perhaps the best thing about such re-arrangement is that there are no additional fees for this service. Borrowers must sign apply for and sign a new agreement to have an EPP take effect. It is imperative that customers request an extended payment plan before the day of the cash advance’s due date.
Credit counseling is another way to get out of debt. Certified credit counselors must take a different approach since the nature of payday loans is so unique. Some payday lenders will not work with credit counseling agencies, so it’s always important to ask that first when you’re speaking with the counselor. Nevertheless, there are remedies that can be taken and that might be as simple as paying off other unsecured debt to free up money to pay back the loans. Even if your payday lender is not willing to work with a credit counseling agency that doesn’t mean all hope is lost. Talk to your credit counselor about this and they can try to find ways to make it work.
Bankruptcy may be the final choice for those drowning in cash advance debt. This option comes with severe repercussions that could detrimentally impact a person’s financial credibility for up to ten years so it’s not a decision to be taken lightly. Speak with a bankruptcy attorney to find out if you have other options first before just filing for bankruptcy.
It may seem impossible to escape the grip of payday loans, but finding a way out of this type of debt is possible. Customers who want to stay away from short-term loans such as cash advances may consider maintaining good credit. Pulling one’s credit report at least once a year is the best way to stay on track.
Payday loans are not an ideal choice for emergencies. They are not meant to serve as permanent fixes to economic struggles. Those looking to get away from the snare of debt should seek to change their spending habits now. Start with setting up an emergency fund now so you don’t have to ever use a payday loan.
The bottom line is that payday loans can be very expensive and they can trap you in a never-ending vicious cycle of debt. Those who need to seek out payday lenders should be cautious and should attempt to pay the loan back as quickly as possible. Usually priced at a fee that is fixed, payday loans add that fee as a finance charge to the borrower. Because these are supposed to be short-term loans only, borrowing can cost a whole lot.