Introductions to Payday Loans
The lower to middle class America makes up about forty percent of the population. Of that population, most all of the households are living paycheck to paycheck. Because they have no spare income, if they have any kind of an unexpected expense, e.g. medical bill or car breaks down, where it is a dire need that they take care of it immediately, they need to find a place where they can get cash fast. Without their car they can’t get to work and risk losing their job. Being ill doesn’t allow for going to work which leaves the bills unpaid.
These situations are causing people to turn to payday loans. A payday loan is a short-term, high-interest loan usually less than $1000. It requires that you provide a post-dated check when you go in, written out for the amount that you are requesting to borrow along with a check stub from your work, a bank statement and your ID. There is no credit check, no worries about debt to income ration. The whole process takes approximately ten minutes, and you are given the money. There is just a nominal, one-time fee, depending on the place, of between $15 to $50 for taking out the loan.
Whenever your next pay cycle falls is when your payment is due. The problem for most folks in this income bracket, they’re finding, is they can’t make those payments once the pay cycle comes around. What a majority of these people do is extend the loan, but in order to do that, they have to pay the fee again to lengthen the loan. After doing this a multitude of times, they end up paying usually ten times what the actual original amount of the loan was to begin with.
Not only is this happening, but the interest rates on these loans go upwards of 400%. This means that even if you are paying your payments on time and regularly, you never touch the balance. Say you borrow $4000, you come to see that you’ve paid $4000…all interest, you look at your invoice and you will still owe $4000 as your balance. All total you will pay over $8000. It’s like a vicious unending cycle of debt.
According to the critics. The payday loan facilities instruct the employees to become “friends’ with the potential customers. They are to ask personal questions about family and the customers’ lives and get them feeling very comfortable with the store, just try to hook them. They’re particularly interested in single moms with multiple children. Essentially, they are in business for you to not be able to pay your loan. That’s what they want.
Proponents of payday lenders feel there is another way to look at the situation. They believe that there is an incredible need for alternative banking services. It’s evidenced by the fact that there are more payday lenders in the United States than there are McDonald’s fast food chains or Starbuck’s coffee shops. The incredible thing about that is there are thirteen states where payday loans are illegal, so this is just in those remaining states.
In the 1990’s there were fewer than 200 payday loan stores in the country. Today it has grown to over 22,000 stores and in excess of a $40 billion industry. The advocates maintain that if the government were to ban the payday lenders, there would still be this need and demand for alternative banking. It’s a poverty issue.
In 2007, when Georgia pushed the payday industry out of the state, there were more bounced checks and more people filed for bankruptcy. Critics feel strongly that is because they’re in debt due to the payday industry. A typical customer takes out nearly eight payday loans per year. They feel this is the form of predatory lending that traps the poor into a never-ending cycle of debt.
They feel this is is what is causing people to go into poverty. It is a quick fix to a bad financial situation. Then once they start, they can’t get out. This is because they’re paying these ridiculously high interest payments, and they have no money left over to pay their regular bills. Some people are no longer able to pay bills like their electricity, car payment, rent. Some are ending up homeless because of this debt.
The government is trying to pass regulations on the payday loan industry where they have to at least screen people when they come in to see where their debt/income ratio is so they know if they can even afford the payments on these loans. They’re also trying to make it that at least part of the payments that folks are making goes towards the actual balance, and the amount will actually go down instead of rising with each invoice.
The truth of the matter is, if you take out a payday loan for any type of emergency, you should only do so if you know you can pay the full balance the next time you get paid. This will make it so you aren’t paying any interest whatsoever, you’ll have no further billing and you get your emergency taken care of. This is really how that particular ‘alternative banking’ system should ultimately work.
Sadly, they take your banking account information. If you have any money in your bank account, they can go into your account and deplete it in full payment of the loan any time they want to based on all of the paperwork they have you sign at the time you come in for the loan. If you do a car title loan which will give you a higher loan amount and you don’t pay it back, they can take your car.
It’s really scary when you get down and think about all the things that they are actually capable of. Because they know at the time you come in that you won’t be able to pay the loan back. Unfortunately, that’s the intention, and the statistics showed that 90% of customers could not pay the loans back.
Some who have gone through the whole nightmare and found their way out gave some pointers on what to do to get yourself in a better position.
TIPS TO GET OUT OF THE PAYDAY LOAN TRAP
– Call the loan facility and cancel the Continuous Payment Authorization (CPA) that they had you sign when you first went in. They had that put on your checking account so that they could take your money out of your bank account to pay the loan in full in case you default. You need to take control back of the loan and get them out of your bank account. You have other bills to pay. You don’t want to sacrifice your utilities, your home, your vehicle, anything important for a payday loan.
– Get it in writing directly from them in person what you owe itemized. Don’t call, go there. Let them print it out and explain to you every penny that you’ve paid, where it’s all gone, the interest you’ve paid, what’s gone towards your balance and where you currently stand. This way you can make a game plan of how you want to proceed. While you’re there, work out a payment plan with them. Be completely honest about what you can afford to pay so you don’t have to deal with anymore penalties or unnecessary fees. If it’s only $20, tell them you can only pay $20 every two weeks.
– Budget. Get yourself on a budge so you don’t have to deal with alternative banking and rely on payday loans to help you through any unexpected emergencies or expenses. If you’re living above your means, cut out the things that you don’t have to have. Lower the cell bill, eliminate the cable, cut corners. Once you dig yourself out to a livable point, create a cushion so you always have spare money to rely on for anything that might come along.
It is really saying something about the shape of the world today that there is a multi-billion dollar payday loan industry in the United States. Especially when you think that these people are in such a position that they would rather pay these ‘lenders’ hundreds of percent interest on top of their balance in order to get money that they need for regular day-to-day expenses because they’re paychecks are not covering them.
It lends itself to ask, are companies/businesses not paying employees enough to survive in the current economy? What are the answers? If this is truly America’s answer to alternative banking, we really need to think of something else better suited for the low income/middle class citizens who work hard for their paychecks.
These places seem almost like legalized loan sharks, and the sad thing is their victims don’t have any where else that they can turn for the money that they need. These guys know that and have capitalized on it big time. I really hope that the government does stand up in some way. Maybe not necessarily to take them away because people are so reliant on them, but to regulate it so people are not so taken advantage of by them. It’s hard for people to admit they need help, but when they do and there’s a vulture waiting…sad.
David is a financial expert who graduated from the University of Fordham (Master in Finance) in 2001. He has 10+ years of experience in private equity and wealth management. With strong expertise in senior-level financial planning, personal financial analysis, and mortgages, David knows his way around personal finance. Before working at CCR he used to be a financial analyst at McKinsey.
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