Most towns have a number of small shops that offer what are
known as payday loans. These stores are usually found in strip
malls and sometimes, depending on the laws of the state, they
double as pawn shops. Their business model is a simple one - the
lend money to people who need a little cash to tide them over
until their next paycheck. The system is convenient and easy to
use; you walk in, show some identification, and write a
postdated check for the amount you wish to borrow plus interest.
On your following payday, the business cashes the check you have
written and your loan is paid in full. This seems like a great
idea - helping people get to their next paycheck by lending them
a few dollars in the meantime. What's the problem? The problem
is that few people realize just how expensive it can be to
borrow money in this manner. The interest rates charged by these
companies are often astonishing, and can reach the equivalent of
more than 400% per year!
The interest rates that payday loan stores are permitted to
charge vary from state to state, but a typical rate for a
two-week loan would be 15-17%. That doesn't seem like much if
you are borrowing $100 and writing a check for $115; but the
annual interest rate on such a loan is actually 390%, which
makes it perhaps the most expensive way to borrow money. The
joke in the industry is that it would actually be cheaper to
borrow from a loan shark than from one of these legitimate
businesses.
The lenders defend these rates, pointing out that such costs are
necessary to protect their business overhead and high default
rate. That may be true, but many borrowers are blue collar
workers who live from paycheck to paycheck. It is easy to fall
into the trap of repeatedly using such loans, and the interest
adds up in a hurry, tuning a convenience into a nightmare.
Someone who is "short" this week may also be short in two weeks,
and a loan of a few hundred dollars can quickly turn into a debt
of a few thousand dollars, especially when late fees and bounced
check fees are added to the total. More than a few borrowers at
such businesses have had to resort to personal bankruptcy in
order to get out from under their mountain of payday loan debt.
Even more egregious is the fact that such loan stores are
frequently located near military bases. Our military personnel
aren't well paid and several members of Congress are not pleased
that these predatory businesses are setting up shop for the
purpose of exploiting our men and women in uniform. Several
states have already passed laws that place limits on the
interest rates that such businesses may charge and others will
undoubtedly follow. A better alternative for anyone with a short
term cash shortage would be to take out a credit card loan or a
home equity line of credit instead. There is usually a small fee
associated with such a loan, but the interest rates, which are
probably no more than 30% , are far more reasonable than the
400% per year charged by the payday lender.
Anyone considering a payday loan should read the terms of the
agreement carefully. Otherwise, that short term loan could haunt
you for years.
Talbert Williams offers debt consolidation referrals and
advice. For more information, articles, news, tools and valuable
resources on debt solutions, visit this site:
http://www.1debtfreedom.com
About the author:
Talbert Williams offers debt consolidation referrals and
advice. For more information, articles, news, tools and valuable
resources on debt solutions, visit this site:
http://www.1debtfreedom.com
