Payday loans can make a bad situation worse
Payday loans are short term loans that consumers take out for short periods against their next paycheck. The periods in question range from a few days to two weeks, typically.
These types of loans are controversial due to the very high (many would say ‘sky-high’) interest rates their fees represent. For example, fees often range from $15 to $25 per $100 borrowed. Nearly unknown 15 years ago, payday loan stores cover the landscape and in some place outnumber fast food franchises.
The borrower will usually write a check to the payday loan store postdated to the date of their next check. The check includes the loan amount and the fee. Therefore, for a $500 loan, the customer might write a check for $600, given a fee of $20 for each $100.
Of course, the problem here is that this represents an annual interest rate of 520%, if the loan is held for 2 weeks. If it is held for just 7 days, the interest rate is a whopping 1040%!
I know what you’re thinking. Might as well just head down to your local loan shark, yes? Yes, it’s almost as bad.
The best approach is never to have to use payday loans. Even credit cards with revolving balances of 10%, 19% or even 24% are infinitely better than payday loans and these should be used when possible.
Many customers use payday loans because they are outside the banking system, with no checking or savings accounts and no credit cards. They are easy and convenience, but twelve states now ban payday loans, and Congress passed legislation in 2006 to restrict payday lending to members of the armed services.
The new Consumer Finance Protection promises new protections from these types of loans and despite objections from some in Congress, may actually get these protections in place in the coming year.
In summary, avoid payday loans when you can.
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