Payday loans and cash advance loans: Are they a convenient way to get the quick cash you need? Or are they a huge ripoff that you should avoid like your chain smoking aunt Tilley with the bright lipstick wanting to give you some “Christmas Sugar” when you were a kid?
If you’ve been keeping up with Celebrating Financial Freedom for long, you probably know I’m getting ready to lay the smackdown on this subject.
So pin your ears back as I get up on my soapbox.
I decided to write about payday loans (also called cash advance loans) when I started seeing a commercial in my local market for a cash advance/payday loan business that gives customers a free lottery ticket with each loan that is written.
How awesome is that?
Encouraging a questionable borrowing decision with a 1 in 170 million shot at winning the lottery. This represents a level of dumb that I hoped did not exist in the world, but alas, my hope is misplaced, and I have found myself profoundly wrong about how far people are willing to go when it comes to using money unwisely.
It seems that many of the customers who use payday loans don’t always realize just how badly they are getting ripped off.
So let’s start out by discovering just what a payday loan/cash advance is and why they stink like Aunt Tilley’s breath.
What is a Payday Loan?
Payday loans are short term (usually 2 weeks) loans that are taken out against the customer’s next paycheck. You provide the payday lender with a paycheck stub to prove you have a job, along with a postdated check for the loan amount plus fees (usually $15 per $100 borrowed, but can vary depending on the payday lender).
If you pay off the loan and fees before it comes due in 2 weeks, they will give you back your postdated check, and the transaction is finished. However, if you don’t pay the loan back in 14 days, they will attempt to cash your postdated check.
If the check bounces, then you’re in real trouble.
You still owe the loan, and now you’ll have bounced check fees from the bank and late fees from the payday loan company to deal with, along with the hassle of collection calls that will make your life absolutely miserable.
As you can see, these types of loans can cause you problems in very short order, especially when you realize that $15 for for every $100 borrowed comes out to an annual percentage rate of 390%!
That means if you borrow just $100 every two weeks for a year, then you will have paid $390 in fees for the privilege of using $100 of the payday lender’s money every 2 weeks. The total becomes astronomical if you’re ever late paying a loan back.
That, my friends, is a recipe for financial disaster!
So why do people use these crazy loans? It’s usually due to one or more of these 3 factors.
- They’re Desperate- Some people feel they have nowhere to turn when they run out of money before their next paycheck, or if an emergency comes up. So they act out of desperation and take the only option that will get them some quick cash to remedy the problem.
- They Need to Make a Payment on Another Debt- Such as rent, or a house or car payment so it won’t go into default or repossession, providing a temporary fix for their problem.
- They Just Don’t Know Any Better- Many of the people that use payday loans or cash advances know they are a bad deal but they feel they have no choice. However, some don’t have a clue about the real cost and take out payday loans as a convenient service to get cash now instead of waiting on their paycheck, only realizing the true consequences when they eventually have trouble paying back the loan.
Easy and Convenient, or Life Sucker?
Payday loans tend to be targeted toward lower income people who live paycheck to paycheck and are the people that can least afford the huge interest rates that they are charged with.
These loans make every customer poorer with every transaction, and only add to the financial desperation that these people are experiencing.
Payday loan stores tout their cash advance services as a convenient way to get money fast, and that much is true. But in the end, they serve to suck the life out of your financial situation, keeping you poor, desperate, and in perpetual debt.
So How Do You Avoid Financial Desperation?
Well obviously, you don’t take out any payday loans or cash advances.
But aside from the obvious, it’s also important to stay on top of your financial situation by:
- Educating Yourself- Read personal finance books and blogs and take courses in personal finance (either mine or someone else’s)
- Making a Solid Plan for Your Money- Get control by making a written budget every single month so you don’t spend more than you make.
- Staying Out of Debt- If you’re out of debt, stay that way. If not, then put together a solid get out of debt plan (I call it a Debt Rocket plan) and work that plan until you’re debt free.
When you take these 3 steps, you work to protect yourself from debt desperation that can so easily cause you to make some very bad decisions.
So go ahead, take action now, and you can guarantee Aunt Tilley will not rear her smoky head and demand some “Christmas sugar”.
Have you ever used a payday loan or cash advance?
What kind of experience did you have?
Tell me about it in the comments.