PayDay Loans - The Math Just Never Makes Sense
Over the summer a previous I had picked up a summer internship with the state doing technology work in a town about an hour away called Sioux Falls, which has a population of about 150,000. He was able to rent a bedroom from a couple he knew for only $200 a month, what a steal. One of the most interesting things that I saw on my way to work were the businesses on the way. There were three payday loan companies, one rent to own business, and a title loan company. Of course these companies were in the poorer part of town, wealthy people don’t make use of these services. Let’s face it, pay day lenders are everywhere, here’s how they work and why you should do anything you can to stay out of them.
Here’s how it works. Let’s say we both have a friend named John who is a bit down in his luck, he’s had an expensive car accident and had to pay $2000 to fix his car which wiped out his savings and paycheck, and now he needs some money to eat. John doesn’t want to starve, so he decides to borrow money, and sees all these commercials on television about a payday lender and how they will solve all of their cash problems. So John goes to the pay day lender, writes them a post-dated check for $450, and they give john $400 in cash and the payday loan company says they will cash his check 2 weeks later on his payday. John now has money to eat, and the payday loan company has made a nice profit. So What’s the problem?
So let’s say our friend John takes the money, buys food, gas and pays his utility bill, and then on his payday they take out the $450. What is John supposed to use to eat with until he gets paid again? Payday lenders merely delay the inevitable. John will have to turn to a payday lender again so he can get by until payday again. He will get stuck in an endless cycle of having to use payday lenders. Instead if John is living paycheck to paycheck, he should take a visit to the food pantry, ask for help from his friends or family, or just do anything to stay out of the payday lender.
Payday lenders are sub-prime lenders and have caused a great amount of controversy. Many have even compared them to loan sharks who target the young and the poor. If you do the math they usually charge anywhere from 400%-800% interest, which is actually illegal in some states. These payday lenders bill themselves as the answer to all of your financial problems and are charging exorbitant interest rates to those who can least afford them.
In the last several years Payday Lenders propped themselves up right outside military bases, and many servicemen fell into the trap, and had too high debt levels that they were deemed a security risk because they might take a bribe, and could not be sent overseas to fight for our country. Congress reacted and made it so companies could not charge servicemen more than 36% interest
Payday loan companies (and other sub-prime lenders) should be avoided at all cost. They are charging your huge sums of interest when you can least afford it, and are terrible financial products. Do whatever you can to avoid them
If I overdraw my Account at the Bank or Credit Union and they advance me the money for a small fee, should I stay away from these places too. Banks fees are being ignored and cost more money than any payday loan company can charge. Here is an example, My son used his debit card to make a purchase for 3.50, he only had $1.50 in his account so the bank helped him out and paid the $2.00 difference, for a SMALL FEE of $35.00. I did the math for you.
Cost of $2.00 overdraft
when bank fee is $35.00
Days APR
1 638750.00%
2 319375.00%
3 212916.67%
4 159687.50%
5 127750.00%
6 106458.33%
7 91250.00%
8 79843.75%
9 70972.22%
10 63875.00%
11 58068.18%
12 53229.17%
13 49134.62%
14 45625.00%
15 42583.33%
Maybe you should look at the whole picture and do a little comparison yourself.
While critics of the industry assign labels to payday lending customers in an attempt to further their political agendas, the fact is that we provide services to a broad cross section of Americans because there is widespread demand for the financial service we provide. Our customers represent a large demographic segment and cannot be grouped based on race, sex or religion. Research shows payday advance customers to be middle-income, educated, working families, 58 percent having attended college, and one in five having a bachelor’s degree. Payday advance customers are not the “un-banked”, as 100% have a checking account at a credit union or bank, but turn to payday lenders for low dollar short-term credit needs.
Millions of customers across the country have used payday advance responsibly and appreciate having somewhere to turn when they need quick access to credit. Analysts estimate payday advances were used by 19 million households in 2006. State regulators confirm that, out of millions of customers, there are very few complaints.
I have used payday loans and found them to be very helpful. I was off work for a few days sick and when I received my paycheck it was short. I had bills to pay so I used a payday loan to suffice. I was able to make up some hours and work some overtime on my next check and that covered the payday loan. There are many stories like mine of people who enjoy having payday loans as a credit option. In fact everyone I know that has used payday loans is happy with the service and has benefited from the service. I had friend get a payday loan to fix his car when it broke down. If he had not been able to fix his car he would have lost more income due to lack of transportation; using public transportation is not an option for him because he uses his automobile to take his work supplies/tools to job sites. He was able to pick up a couple extra jobs on the side and pay off his payday loan. My daughter used a payday loan to cover a medical bill that was on the verge of going to collections and then paid off the loan with her income tax refund. Not every consumer of the payday loan industry finds them self trapped and not able to pay back the money they borrow. Bad news is always the “interesting” news. Why isn’t anyone listening to the people who successfully use the service and APPRECIATE it!!!
True, not everyone should consider taking out a payday loan especially if they know that they won’t have the ability to pay back on their next payday. However, payday lenders should not all be lumped into the same category and furthermore, laws vary depending on the state. Some states allow customers to make several payments with a certain percentage of pay down while others make it mandatory to pay off in full. Mandatory pay-offs are not the lenders decision but the legislators. In addition, all payday lenders that are a part of the industry’s trade association allow individuals with extreme financial difficulty, to make equal payments on the loan amount without any additional interest. All payday lenders are not out to “trap” their customers.