More Proof That Payday Loans Suck

Photo (cc) by taberandrew

Payday loans, no matter how reasonable they might look on the surface, are nothing less than a financial kick in the stomach, often delivered to those least able to afford it.

A February 2013 report by the Pew Charitable Trusts says almost 12 million Americans take out payday loans every year. And as you might imagine, the borrowers are frequently those least able to afford it. According to Pew, the typical borrower is white, female, 25 to 44 years old, without a college degree, and making less than $40,000 a year.

The report shows that a majority of those surveyed – 58 percent – had trouble meeting monthly expenses at least half the time and turned to payday loans as a financial option to handle the shortfall.

How payday loans work

Payday loans are small, short-term loans backed by your paycheck. You apply for a loan, listing your next two or three pay dates on the application. After getting approved, you write a postdated check for the loan amount plus interest and fees. On your next payday, the lender collects the balance, unless you choose to roll the loan over until your next payday.

Most payday lenders don’t consider your credit history, so people with bad credit can still get approved as long as they have a source of income. And many lenders will give you the cash in just a few days, or hours in some cases.

Why they suck

Payday loans come with steep fees and interest rates – upwards of 300 percent.

Take a look at Credit.com’s list of payday loan laws by state showing the maximum interest rate lenders can charge. Check out some of these terms:

Alabama – 17.5 percent
Colorado – 20 percent of the first $300, 7.5 percent for the remainder
Louisiana – 16.75 percent

These interest rates may not appear excessive – they seem similar to credit card rates. But credit cards quote the amount you’ll pay over a year, while payday lenders collect their interest in as little as a week. Annualize rates like those above and you’re paying triple-digit interest. Florida law, for example, allows only 10 percent interest, plus a $5 fee for loans from seven to 31 days. Do that for a year and you could be paying nearly 400 percent.

It’s when the loan gets extended – called a rollover – that the fees really add up. Lenders allow customers to extend their loans to the next payday if they pay the fee plus any accrued interest. The borrowers become trapped in a loop of paying fees and interest because they aren’t paying down the principal. And according to the Pew report, fewer than 2 out of 10 borrowers can afford to pay off the average loan when it comes due.

Average borrowers end up taking five months to pay off a loan, the report says, paying $520 in finance charges for loans averaging $375.

Why do we allow this?

While the industry claims “short-term credit products are an important financial tool for individuals who need funds to pay for an unexpected expense,” there’s evidence people can survive without them. From the Pew report:

In states that enact strong legal protections, the result is a large net decrease in payday loan usage…In states with no stores, just 5 out of every 100 would-be borrowers choose to obtain payday loans online or from alternative sources, while 95 choose not to use them.

There’s been an effort in some states for years to regulate payday loans. In our 2010 article Payday Lenders Dropping Like Flies, we reported payday lender Advance America closed all 47 of their locations in Arizona after a law passed limiting interest to an annualized 36 percent.

What’s the alternative?

The irony revealed by the Pew report is some borrowers end up turning to family and friends to repay their loans – something they could have done first and avoided the payday loan in the first place.

The Center for Responsible Lending offers other alternatives, including working out a payment plan with creditors, asking for an advance at work,

  • community-based emergency assistance programs, loans from
  • credit unions,
  • cash advances from credit cards, and
  • small consumer finance companies, where rates are often lower.

The long-term solution is not living paycheck to paycheck – obviously something tough for the working poor to do.

Using a financial windfall like a pay raise or a tax refund is a good way to start getting yourself out of the trap. And there are plenty of little ideas that could add up; see articles like 30 Tips to Spend Less and Save More.

Some of my favorite ways to trim spending include:

1. Start with the little things. Whether it’s beer, cigarettes, the lottery, lattes, or junk food, many people blow $5 a day because they think it doesn’t matter. It does: $5 a day for a month is $150. Over a year, it’s more than $1,800.

2. Brown bag it. It takes planning to bring your lunch to work, but in the long run it’s healthier and much cheaper than fast food. See 7 Cheap and Easy Work Lunches You Can Bring From Home.

3. Buy generic. Many products are the same regardless of the name on the package. Check out 7 Things You Should Always Buy Generic for ideas.

The bottom line

Payday loans may be convenient, but they’re a rip-off. There are only two ways out of the trap: make more or spend less. If you’ve done everything you can to trim your expenses, check out stories like 8 Weird Ways to Make Extra Money.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Cheap and Easy Ways to Make Your Car Smell Delightful
5 Cheap and Easy Ways to Make Your Car Smell Delightful

These tips will leave your ride smelling delightful for next to nothing. Some options are also chemical-free.

7 Reasons You Should Consider a Career Change at 50
7 Reasons You Should Consider a Career Change at 50

Wondering how to change careers at 50, or if it’s possible at all? The good news is that many older workers have the energy and experience to pull it off.

7 Reasons to Carry Mortgage Debt Into Retirement
7 Reasons to Carry Mortgage Debt Into Retirement

It often makes financial sense to not pay off your mortgage before retiring.

5 Ways Social Security Will Change in 2021
5 Ways Social Security Will Change in 2021

These adjustments will affect both workers and retirees in the new year.

Beware These 5 Common Work-From-Home Scams
Beware These 5 Common Work-From-Home Scams

You can spot scammers and con artists with a little know-how.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

What a $15 Minimum Wage Means for Social Security
What a $15 Minimum Wage Means for Social Security

A federal minimum-wage hike could affect the Social Security system dramatically.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

10 Deep Discounts Available on Amazon This Friday
10 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

7 Costly Health Problems That Strike After Age 50
7 Costly Health Problems That Strike After Age 50

As we age, our bodies wear down. Here is how to cut costs associated with some common ailments.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.