A friend of mine was telling me about how he took out a few payday loans over a year ago. He said that he was strapped for cash and needed money in a hurry. He didn’t want to ask friends or family so he went to a payday lender. He then proceeded to tell me a story of a never ending cycle of usurious interest rates, high processing fees and payments that kept him in debt for 16 months. He explained how a loan of $1500 ended up in a repayment of over $10,000.
When I heard his story I decided to look deeper into payday loans. I started by googling the phrase “payday loans”. Over 5.75 million entries were returned by google search, I clicked on a few sites to do some investigating. To qualify for a payday loan you just need 2 forms of identification, bank statement, pay stub, personal check, social security number and a utility bill. That sounds simple enough. Payday lenders often refer to themselves as the quick and easy solution to your cash flow problems. Bad credit? No problem. Caught between paychecks? No problem. Short on cash? No problem. The problems come when you take a deeper look at the fine print in payday loan agreements.
Payday loan websites make it as difficult as possible to determine the APR that they are charging. The most popular websites have interest rates ranging from 500% to a whopping 1630%. For every $100 borrowed many payday lenders will charge a “service charge” of $25 every two weeks. For example if you borrowed $1,000. You would pay $250 biweekly to keep the loan active and none of this money would be applied to the principal. You would be making a $500 payment every month and not a dime would go to the principal of the loans. Payday loans have no maturity date and continue in perpetuity until you have enough money to pay more then the weekly service charge.
The terrible part about payday loans is that they have onerous terms designed to prey upon the working poor that have bad credit. The interest rates offered are ridiculous. If someone is desperate enough to visit a payday lender for $1,000, what do you think the chances are that the same person will have $1,250 in two weeks to pay off the loan? Little to none. Most people just scrounge up enough money to keep paying the service charges to keep the loan active. If a person is fortunate enough to ever pay the loan off, they will likely find themselves in need of another payday loan due to the bad terms of the first loan. What payday lenders fail to tell people is that what many people believe to be a lifeline utlimately turns out to be an albatross driving them deeper and deeper into financial ruin.
