Payday Loans: Some Nasty Facts

Avoid payday loans at all costsThe economy is in poor shape. You need to buy a few things, and feel they can’t wait until your next paycheck. You don’t want to ask family or friends for a loan, because it’s embarrassing.

So, what do many Americans do? They get a cash advance on their next paycheck, otherwise known as a payday loan. It seems a convenient option. You just have a bit less pay the next time it comes. But wait! What about the interest?!

Would you believe that interest rates on payday loans are as high as 500 percent? Now that really is a disgrace. Figures from Pew Charitable Trust found that, on an average payday loan of $375, the borrower pays interest of more than $500.

The trouble with this, is that the average borrower can afford to repay only about $100 per month. So, you take out another loan to repay the old one, and it becomes a never-ending debt cycle. So much so, that the Insight Center for Community Economic Development reports payday loans cost the nation $774 million in consumer spending and the loss of 14 000 thousand jobs in 2011. Incredible!

But there is still good news, and here it is:

  • The Consumer Financial Protection Bureau is looking at reforming rules for short-term loans. These include a compulsory assessment of the client’s ability to pay back the loan, and a cooling-off period between loans.
  • Democrats, including Senator Dick Durbin, have offered a bill to cap the interest rates. Some states are considering the same, if they haven’t already done so.
  • JP Morgan Chase, is giving more control to borrowers at the end of this month. Lenders will not be able to withdraw money owed from the borrowers’ accounts any more, without the borrowers’ consent.

The lesson here is to not take out payday loans under any circumstances. You’re hurting yourself and your country, and helping support a despicable sector of the loans industry. For more on this story, visit CNBC.

Philip

4 Comments

  1. I don’t understand why payday loan companies are allowed to charge such high interest rates, yet when the loan shark down the road does it, he is a criminal.

  2. 500%?! Isn’t that illegal? I thought that anything higher than 12% was considered loan sharking in the US? Even if it isn’t, it definitely should be. How can they get away with ripping people off like that?

  3. A few years ago I was also tempted to use this option, and unfortunately I did, and regret it to this day! I have lost so much money to pay back the debt, but I’ve learned my lesson! Never again. That pair of shoes or that fancy dress can wait a few more weeks! It’s just not worth it.

    • Sorry to hear that. I guess it’s best to look at it as a learning experience, and not beat yourself up about it. Fortunately I have never had to take one of these loans, but there are still a lot of people falling for it every day. I suppose it is partly desperation and partly not realizing what they are getting into.

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