Millions of Americans turn to payday loans each year only to find that they can be a very costly way to get quick cash.
No matter what they’re called – payday loans, cash advance loans, or deferred deposit loans –people end up facing fees that translate to interest rates ranging from 200% to more than 500%.
And many people end up paying more in fees than the initial amount of the loan itself.
Here’s how it works …
People who go to payday lending businesses in storefronts or online often need money quickly so they can pay bills ranging from car repairs to rent.
If the person qualifies, the lender makes them a short-term loan – usually for a period of two weeks. You know, enough to get by until their next payday.
To get the loan, borrowers will be charged a fee somewhere between $10 and $20 for each $100 borrowed.
But there’s a big catch – you’re not allowed to make small payments on the loan until it’s paid off – you either pay the full amount or nothing. And that’s where people can get trapped.
Studies have shown many people can’t afford to repay the full amount at the end of only two weeks, so they have to keep extending the loan for more time and continue to pay more fees.
A report by the Pew Charitable Trusts found nearly 12 million Americans take out payday loans each year, and that the average payday loan isn’t paid off for five months.
Here’s what that means …
If someone borrows $300 and has to pay $15 in fees for each $100 borrowed, they’ll owe $345 at the end of 14 days. If they can’t afford to pay the full loan amount, there is the option to extend the loan for another $45 fee every two weeks the loan payment is extended.
And that’s when the expenses can soar. If a borrower pays $45 every two weeks for five months, they will pay $450 in fees alone. That’s an interest rate of 391% and is more than the amount of the loan itself. And they still have to repay the initial $300. So in five months, that $300 loan ends up costing the borrower at total of $750.
There are alternatives to costly payday loans …
- Your best bet is to always expect the unexpected. Cut back on living expenses wherever possible and put money into a savings account. It might be hard on a limited income, but even having $500 in emergency savings can be a huge help. Preparing and following a household budget can help you see where you can reduce costs in order to save money, and can alert you in advance to possible cash-flow problems.
- Check with your financial institution to see if they offer short-term small loans. If so, the interest rate they charge will be far below a payday lender, and you’ll be able to make installment payments rather than being forced to repay the full amount all at once.
- Try contacting your creditors to ask if they will give you more time to pay your bill. You might be forced to pay a late-payment charge, but it will be far below payday loan costs.
- If you have a credit card and haven’t reached your limit, you might consider using it and then making payments over time.
- If you seem to be trapped in debt and need help working out repayment plans or creating a budget, try contacting a non-profit consumer credit counseling service to see if they offer no-cost or low-cost assistance that would work for you.