When you’re struggling to make ends meet, you may be tempted to take any financial relief you can get. However, some forms of short-term relief, such as payday loans, can cause even more emotional and financial stress in the end.
What are Payday Loans?
Payday loans are loans that are made for a short period of time, often two weeks, mimicking a pay period. Typically, when you visit a payday lender, you tell them how much you’d like to borrow, and they tell you what fee they’ll charge for that amount. You give them a check to hold for the total amount of the loan and any fees, and they give you the amount of the loan in cash.
The Federal Trade Commission highlights an example of how a typical payday loan may work.
- You need $500 to make ends meet until your next pay day. You visit a payday lender and are told you’ll be given the cash for a $75 fee. You’re required to write a check for $575 to the lender and are given $500 in cash. The total $575 must be paid back by the due date to keep the lender from cashing the check.
In this scenario, if you don’t repay the loan back in full, the payday lender may cash the check or use the provided checking account information to attempt to collect the funds, even if there’s not enough money in the account. This can cause you to face additional bounced check or overdraft fees.
Are Payday Loans Bad?
Payday loans are problematic because of the substantial fees they charge to borrow money for a short period of time. The APR (or interest rate) on payday loans is typically very high and far greater than what someone would be charged if they borrowed the same amount from a traditional financial institution, such as a credit union or bank.
In the best-case scenario, borrowers can pay off payday loans in full by the due date, being affected only in the short term due to the high fees they were charged.
Unfortunately, many payday lenders bank on borrowers falling into more of a worst-case scenario. This is how they’re able to make a great deal of money – borrowers can’t pay off the loans and rack up increasing amounts of debt by extending the due date or getting into a dangerous cycle of borrowing additional funds to pay off the fees they’ve incurred.
Are Payday Loans Predatory?
Payday lenders are often classified as predatory lenders. This is due to the high fees referenced above, as well as some unsavory practices that are common in this industry.
Payday lenders are typically more prevalent in areas with underserved populations. They may open offices in inner-city locations with limited access to reliable credit unions and banks. They may also target advertising to low-income households or those with damaged credit who are unlikely to get approved for a typically lower-cost credit union or bank loan.
Additionally, payday lenders often look to profit off situations in which people are vulnerable. By tapping into people’s emotions during difficult times, they can position themselves as a source of immediate relief or an easy, quick fix. Unfortunately, as described above, this short-term relief can cause long-term financial and emotional distress.
What Other Options Exist?
If you’re in a tight financial situation and need relief, there are options to consider before visiting a payday lender.
The first is to reach out to a reputable credit union or bank and determine if there are loan options that you qualify for at a reasonable interest rate. Especially during times of crisis, some financial institutions may offer loans at lower interest rates than usual, allowing you to save more on interest in the short and long term.
Unfortunately, if you have poor or limited credit, there’s a chance that you won’t qualify for a traditional loan from a credit union or bank. However, there are still steps you can take to make ends meet and protect your finances from long-term harm without taking out a payday loan. These include:
- Contacting companies or lenders before you miss a payment – Many lenders are willing to work with you if you’re having trouble paying your bill. However, it’s important that you reach out before your account becomes delinquent. You may be able to defer payments or work out a reduced payment plan.
- Asking utility companies about available resources – Utility companies, such as electric or gas companies, may be able to point you to resources to get help paying your bills. For instance, in Pennsylvania, the Department of Human Services administers the Heating Assistance/LIHEAP program to help low-income households keep the heat on during the winter months.
- Knowing your rights – During crises, such as the current COVID-19 pandemic, that impact entire communities, many states work to protect consumers from hardships such as evictions or home foreclosures. In Pennsylvania, for example, the Office of Attorney General has put together a Rights and Resources Guide to help individuals navigate financial hardships during this time. Additionally, if you’re a member of the military, there may be additional protections in place for you and your family at any time you’re considering a payday loan.
- Monitoring your credit – It’s always important to keep an eye on your credit. In times of crisis, however, you should make it even more of a priority. Checking your credit report can help you ensure that lenders are reporting your payments correctly and aren’t marking accounts as late if you’ve come to an alternate payment agreement. Typically, you can receive your credit report for free once a year from each of the three major credit reporting bureaus by visiting www.AnnualCreditReport.com. During the current COVID-19 crisis, however, these three agencies have agreed to provide consumers with free credit reports on a weekly basis through April 2021 to help individuals ensure their credit isn’t being inadvertently harmed.
Read More About Managing Money in Crisis
If you’re facing a financial crisis, you’re not alone. We have resources that can help you as you navigate the impacts of crises such as the COVID-19 pandemic. Visit our blog and click on the Navigating COVID-19 tab for more resources on preparing to be laid off, managing student loans, and effectively using your emergency fund.