The Truth About Payday Loans

What is the truth about payday loans? Within the credit industry, no one is more reviled than the payday loan companies. They are notorious for high interest rates and for bamboozling consumers into a self-destructive cycle of debt from which they will never recover.

The payday lending companies say they merely provide a service that people need, and argue that while some people make bad choices there is still a legitimate market for the service they provide.

So then are payday loans really as bad some people say they are? Let’s look at the facts:

According to the Consumer Federation of America, a consumer watchdog group, the finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs.  Rates are higher in states that do not cap the maximum cost.

Who in their right mind would take our a loan with that kind of interest rate?! Right?

Well, the companies are more cleaver than than to tell people they’ll be paying close to a thousand percent interest rate. What they do is give it a reasonable sounding spin like 21.7% and make the term for two weeks. What many folks don’t realize is if the loan isn’t paid back in full in two weeks they’ll be charged another 21.7%

and another 21.7%…

and another…

and the cycle will continue making the APR in hundreds percentile.

It’s no wonder that those who are approved for payday loans are more likely to file for chapter 13 bankruptcy than those who are rejected. source US Dept Treasury

Let’s give a common scenario.

DeShaun needs $700 to fix his ride so it’ll pass smog. He goes to the payday loan shop down the block and takes out a loan for $700 at 21.7% for 14 days. After 14 days he owes $840.

That doesn’t sound bad but..uh…if he didn’t have $700 what makes you think he’s got $840 two weeks later?

The more likely scenario is he pays back a portion like $150 every two weeks. After a year he will have paid $3,698.71  with $2,998.71 being interest! 

And that’s if he doesn’t miss a payment!

Oh and he also has to give a post dated check to his bank account to they can try to take the funds if he doesn’t pay.

Blacks disproportionately affected

According to US News Blacks are more than twice as likely to take out payday loans. But why is payday lending so prevalent in black communities?

Payday loans are taken out by all groups in society, but those with limited resources are most likely to need emergency funds.

Although the loans are intended for a one off expense, the majority of them are used to deal with the pressure of ongoing financial shortfalls instead.

Black people are much more likely to take out a payday loan than other racial groups. This is partly due to the wage gap, and also down to the heavy use of advertising in black neighborhoods.

The post dated check requirements is one of the reasons why many Black people don’t use their bank accounts for fear that their money will be stolen

The Government Helps a Little

The Consumer Finance Protection Bureau (cfpb) has recently released new guidelines to try to stop the worse abuses of the payday loan industry. Those new guidelines include:

Full-payment test: Lenders are required to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations. For payday and auto title loans that are due in one lump sum, full payment means being able to afford to pay the total loan amount, plus fees and finance charges within two weeks or a month.

Principal-payoff option for certain short-term loans: Consumers may take out a short-term loan of up to $500 without the full-payment test if it is structured to allow the borrower to get out of debt more gradually. Under this option, consumers may take out one loan that meets the restrictions and pay it off in full.

Debit attempt cutoff: The rule also includes a debit attempt cutoff that applies to short-term loans, balloon-payment loans, and longer-term loans with an annual percentage rate over 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account.

Payday Loan Alternatives

All the advice in the world won’t get you out of debt if you just don’t have the money. As mentioned in The Truth About Black Debt  many Black families take out payday loans just to survive. While we  discourage adding more debt bad credit loans can be beneficial in that they can:

  1. Consolidate your debt
  2. Ease your financial stress by turning a whole bunch of payments into one
  3. Save money by getting rid of multiple interest rates
  4. Give you breathing room while you work out a financial plan
  5. Help you avoid bankruptcy

Got bad credit? So what…

It’s getting a lot easier to get a loan with bad credit than it used to be. BadCreditloans.com  is a good bet to get a loan. They are a networking company in that they worth with a variety of lenders to present you with the best interest rates. You just fill out their fast and convenient online loan request and you can get a personal loan offer in minutes from their network of lenders. Your approved loan can be deposited electronically into your checking account in as fast as one business day.

There’s also PersonalLoans.com they can give you a loan up to 35k. They too say yes when everyone else says no.

Both of these are good options to help consolidate your debt and get out of it. What is particularly good about these two companies is you can submit an application online and usually get an answer very quickly so you don’t have to waste your time.

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