Let’s have a show of hands. Who would like to get into debt fast, raise your hand! I don’t see any hands…maybe because this is the internet, but usually, it’s not a life goal to get into debt, especially fast. Unfortunately, thousands of people who utilize the services of payday lenders every month do exactly that.
What’s a Payday Loan?
Payday loans are designed to meet short-term consumer credit needs and are offered by non-depository institutions at storefront locations around the U.S., or online. When banks offer payday loans to their existing customers, they are called deposit advance loans. The intent is that the full amount you borrow will be repaid on your next payday. Payday loans are typically small and are usually secured by a post-dated check or a future withdrawal from a personal checking account. If you complete an online loan application, they usually provide authorization for the lender to withdraw payments from a deposit account. The cost of a payday loan is a fee which is based on the amount advanced, and on average, yields an APR of 391% on a typical 14-day loan!
Don’t Fall Into a Debt Spiral
Consumers are attracted to payday lending, due to the ease and speed in which they can obtain the funds. And, when used wisely, payday loans can assist during an emergency. But, in order to be used prudently, the funds must be repaid within the 14-day loan period.
However, for many borrowers who aren’t able to repay the loan within that time period, the downward debt spiral begins. The average customer rolls over their short-term loan about ten times before it’s paid in full. In the end, the interest they will have paid is often more than the original loan amount, and their financial situation is considerably worse than when they initially took out the loan.
Facts & Myths about Payday Loans
The Consumer Financial Protection Bureau(CFPB) recently released the results of a study they conducted of payday loan products in which they found the following facts regarding payday loan activity:
Payday borrowers took out an average of ten loans per year and 14% took out at least 20 loans.
More than half of all payday loan users borrow more than $3,000 a year and typically wait less than two weeks before taking out another loan. This group tended to be indebted for over 40% of the year.
- Click here to read about some of the common myths on payday loans based of a recent report from The Pew Charitable Trusts.
Payday loans can be risky and you may want to consider other options before using them, like some of the suggestions that my colleague Kieza Carpenter wrote about here. If you have no other choice, borrow only what you can afford to repay, so that you don’t get caught in a debt cycle which could quickly spiral out of control.
For more information regarding the CFPB, go to their website - http://www.consumerfinance.gov/
Click here for more information regarding the problems of payday loans - http://www.paydayloans.org/
Please share this information with someone you know that is considering a payday loan, and let us know any questions or what your experience has been with payday loans in the comments below.
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