Why Payday Lending is Such an Awful Deal
We’ve all seen them. Some of us have probably even been tempted to get one. They are generally known as payday loans, although they have many different names – including cash advances, pay advances or unsecured loans.
But no matter the name, all payday loans mean one thing: a really bad deal for borrowers.
Walk past any payday loan shop and you’ll probably see a number of signs in the windows.
The purpose of these flashy signs is to get someone’s attention and go inside one of these businesses.
But instead of doing that, we’ll tell you exactly what these services really are, so you don’t have to go in.
Checks Cashed: This service will take a paycheck and turn it into cash money for a customer.
Cost: In some states, payday lenders can charge at least 3% for this. For someone cashing a $1,500 check every two weeks this would cost $45, or $1,700 annually
Money Orders/Bill Pay: This is an alternative to using checks or electronic payments to pay bills, since cash is not accepted through the mail or online.
Cost: Mybanktracker did some research on Western Union, finding that on average it charges $.70 per money order, which would be $8.40 just to pay a monthly bill yearly through the mail.
Title Loans: Also known as a secured loan, this is where a lender will keep something of value as collateral from a borrower. Usually, a car title is used.
Cost: According to Car Title Loan, the average percentage rate of these loans can vary between 36-360% in annual percentage rates, or APR.
Payday Loans: These are short-term loans designed to help a borrower short on money until their next paycheck.
Cost: Usually a flat rate, for example $10 to borrow $100 for two weeks. Lenders must also inform borrowers of the annual percentage rate (APR) of these loans. Which leads to more than 200%!
Slick advertising targeted towards borrowers trying to make ends meet is a well-worn marketing tactic in the short-term lending industry.
Often payday loan shops will entice prospective customers by showing them a deal right on the window. It is not uncommon to see displays like this:
The question is, how is it possible for these lenders to lend borrowers hundreds of dollars for only $20? Because in the short term, these lenders make them look like a flat fee loan. But what they really are is an extremely expensive credit card if borrowers don’t pay back the loan in time.
Calculating the Long-Term Cost of a Payday Loan
There are deceptive issues with the so-called flat fee structure that payday loans use.
Take the example above for the CashMoney payday-lending store. If a borrower were to obtain $200 for $20 over two weeks, the APR of such a loan is 260% and would cost:
Source: The Calculator Site
This doesn’t include additional fees that might be levied against a late borrower. According to MoneySuperMarket, a survey found only half of payday loan borrowers are able to pay back the amount owed in time.
For example, payday lender Check Center charges a $15 late fee when payment is not on time – and doesn’t specify on its website how often this could be charged.
In some jurisdictions, payday lenders are required to notify lenders of APRs – you can see an example chart on the Check Center website. The purpose is to serve warning about the expenses of late payment, which can build up immensely over time for borrowers of these types of loans.
Calculating Long-Term Cost of a Title Loan
According to Bankrate, the cost of a title loan is usually somewhere around 25% for 30 days.
Borrowers must submit a title and access (usually in the form of keys) to the lender as collateral. These loans are usually a fraction of the value of an asset put up as collateral.
25% every thirty days is over 300% APR. If a borrower takes out a $5,000 loan using a title to secure it, to pay it back in one year would cost:
Source: The Calculator Site
Again, this doesn’t include additional fees that might be levied against a late borrower.
It’s no wonder that payday loan operations usually set up shop far away from banks and dress up storefronts with colorful, eye-catching signs. Because if a borrower gets caught in debt to one of these lenders, it is very hard to escape as the costs begin to escalate.
It’s easy to wonder, then, how these lenders are able to stay in business legally – if you fell behind when borrowing money from a payday lender, you could get into some serious trouble.
For example the Guardian recently reported that the number of complaints about payday lenders in the UK have doubled in just the past year – sure to bring attention to the problems of payday lenders by lawmakers.
Stay away from payday lenders. There are other alternatives to borrowing money.
A peer-to-peer bitcoin loan is an option. So are banks, credit unions, friends or family – anything is better getting involved with these short-term lenders.
Simply put, payday loans are not worth it. There are plenty of other options for borrowers.
