Is a Payday loan or cash advance loan a convenient way to get the quick cash you need? Or are they a huge ripoff 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 reading the CFF blog for long, you probably already know where I stand on this one.
So get ready while I step up on my soapbox.
Payday Loans and Free Lottery Tickets!
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. I have found myself profoundly wrong about people's poor decisions when it comes to money.
It seems that many of the customers who use short term loans don't always realize just how badly they are getting ripped off.
So let's start out by discovering just what is a payday loan and why they stink like Aunt Tilley's stale cigarette breath.
What is a Payday Loan?
Payday loans are short term loans (usually 2 weeks) that are taken out against the customer's next paycheck.
First you provide the payday lender with a paycheck stub to prove you have a job. Then you provide a postdated check or authorize an auto draft for the loan amount plus fees (usually $15 per $100 borrowed, but can vary depending on the payday lender and state laws).
If you pay off the loan and fees before it comes due in 2 weeks, they will give you back your postdated check. If that happens, then the transaction is finished. However, if you don't pay the loan back in 14 days, they will attempt to cash your postdated check.
What if the Check Bounces?
You still owe the loan, and now you'll have bounced check fees from the bank. You'll also have late fees from the payday loan company to deal with. Plus the hassle of collection calls that will make your life absolutely miserable.
As you can see, payday 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%!
Think about this… 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!
Why Do People Use Payday Loans?
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 they are backed into a corner if an emergency comes up. So they act out of desperation, taking 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. This keeps them from going into default or repossession, providing a temporary fix for their problem.
- They Just Don't Know Any Better- Many people who use payday loans or cash advances know they are getting screwed but they feel they have no choice. However, some don't have a clue about the real cost. They take out payday loans as a convenient service to get cash now instead of waiting on their paycheck. They only realize the true consequences when they eventually have trouble paying back the loan.
Easy and Convenient, or Terrible Financial Choice?
Payday loans tend to be targeted toward lower income people who live paycheck to paycheck. Unfortunately, they are the people that can least afford the huge interest rates payday lenders charge.
These loans make every customer poorer, 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, which is true. But in the end, they suck the life out of you, and do nothing to fix your financial situation. Payday loans keep you poor, desperate, and in perpetual debt.
When it comes down to it, more money is not going to solve the problem.
So How Do You Avoid the Payday Loan Cycle?
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. Take courses in personal finance (Here's mine).
- 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”.
Question: Have you ever used a payday loan or cash advance? What kind of experience did you have?
Tell me about it in the comments.
Resources:
Are Minimum Credit Card Payments Really Affordable?
How Do You Get Out of Debt? (Part 3)- 1G for an Emergency
4 Steps to Getting Rid of Car Payments
I used to use payday advances a whole lot before I recently became credit card debt free. Using the payday loans becomes a cycle. I would borrow sometimes $200 and end up paying back $230.90. The paycheck advances took a big chunk of my paycheck before I got my paycheck. I have not used a payday advance in 5 months. I am glad to get off the cycle of payday advance rat race. I have learned how to budget and stick with my budget. Simply if I do not have it I do not borrow. "Borrower is slave to the lender" and I got tired of being one to payday advances, credit cards and etc.
Way to go Ajavee, you are no longer a slave!
Yes, it’s a last resort for people who are desperate. I guess it’s better than going to a loan shark that might break your legs! I don’t know how a person gets out of their emergency once they’ve gone to the payday loan place. Hopefully most people will save an emergency fund to avoid being in this situation.
An emergency fund is definitely the way to go, but if you don’t have one it’s so easy to resort to these kinds of loans out of desperation. I don’t know how people get out of these loans once they get hooked in, but I’m sure it’s difficult.
Payday loans can be rather expensive. I myself owe about $1100 total to 2 separate $400 loans. They get you with the "first time you borrow there is no interest". Then it starts to get expensive. I think for $400 my repayment was $535 which was needed 2 weeks later. It can really turn out to be a costly affair if you haven’t saved an emergency fund.
That’s a huge amount of interest! Just goes to show that they know how to market their product to people and get them hooked in.
Payday loans are without a doubt the most expensive way to borrow money. But many unbanked people use them exclusively. It is sad because they suffice a need, and for the most part the people who use them do not have another option.
Yeah, it’s unfortunate because many people feel they don’t have another option. That’s why I’m a huge advocate for budgeting and making a plan to become debt free so people don’t have to resort to these ripoffs.
I have never used payday loans and agree that they are the devil in person. People should take a cash advance on their credit card as a last resort, but I guess most don’t have access to credit either.
A cash advance on a credit card would be almost as bad a move as a payday loan. You’re right, many don’t have access to credit, and payday loans are how they finance life. But there are better ways to do things that don’t have to cost an arm and a leg. Sometimes that means finding ways to make supplemental income, or even learning to budget effectively so they don’t spend more than they make.
Free lottery tickets with a payday loan sounds like those frozen pizzas that come with chocolate chip cookies! In both cases someone decided it made even MORE sense to package together things that are bad for you! Unreal! Great post.
Anything they can do to get people into the door and into these loans. I think Lottery tickets are probably the most perfect fit for this kind of marketing.
You see payday loan offices in most downtown sections of low income neighborhoods. They combine operations with check cashing services. Many of the residents are unbanked and live check to check in good times. They operations provide a valued service, but the costs are very high.
The costs are very high and charged to the people that can afford it the least. I see these places even in some of the higher end suburbs as well, but there are many more in the poorer neighborhoods.
I’ve never used a payday loan but I know all about them. We have a mate that has and it just digs the hole deeper and deeper for her. Budgeting even $5 a month into a savings is better than nothing. The hard part for some is change as our mate said she had no money to save whilst sipping on her almost $2 X-large Tim Hortons coffee 1 of 4 per day. Change starts with-in… Great post mate.
Right, you have to learn good financial habits to stay out of making desperate moves with your money. When you act out of desperation you dig the hole deeper, finally getting to a point where you can’t fill it back in.