We’ve all been there. Things are tight already, you have no idea how you’re going to pay this month’s bills, and while you’re driving to work (mentally calculating the risks of living off of ramen noodles) the transmission falls out of the car, causing you to swerve into a construction zone where nails pop three of your tires. Okay, maybe we haven’t been there exactly, but most of us know the feeling of panic when unexpected bills start piling up. The temptation to run to the nearest payday lender (just to get us through until next payday of course) can be overpowering. But before you head down that road, let’s take a look at payday loans, and find out if there are better options.
Why Are Payday Loans So Attractive?
Payday loans feel like a quick fix. They have locations everywhere – you can barely drive down any city street without passing two or three payday lenders – and you can get cash and be out the door in less than 15 minutes. Most of the time there’s no credit application and no delay for bank approval. You just give them whatever information they ask for (contact information for yourself and maybe a few friends, bank information and employment information for example).
How Do Payday Loans Work?
While the process differs from lender to lender, the gist is as follows: you go in (or apply online) and give them, along with your personal information, a check for the amount you’d like to borrow, plus fees and interest. According to HowStuffWorks, a $15 fee for every $100 is pretty common. So if you’re looking to borrow $500, you write them a check for $575, which they hold for two weeks, or whatever their loan term is. At the end of the two weeks, they deposit your check, which pays the loan back. If, at the end of the two weeks, you can’t afford to pay the loan back, you can roll it over into a new loan, with new fees. You can generally do this as many times as you want.
So What’s the Problem?
Well, if you’re in enough financial trouble that you need $500 in the next 15 minutes, chances of your being able to pay it back in two weeks are pretty slim most of the time. Payday lenders bank on this, in fact. The whole structure is designed to keep you in debt to them (with ever increasing fees) for a long time. Using the $15 fee per $100 borrowed (although fees can be higher or lower), you are paying roughly $5.36/day. That’s steep for two weeks, but what if it goes longer? Let’s say you keep rolling it over for 6 months. By the end of 6 months, you’ve paid $991.60 ($5.36 x 185 days) in fees. That’s nearly twice what you borrowed, in addition to the original loan. So the original loan sounded like a 15% interest rate (which is pretty high, but if you have bad credit it is to be expected), but by the time you pay it off, it’s reached astronomical, unthinkable numbers like the 198% interest rate in the example above.
Well, What Can I Do Instead?
That’s a great question. The other options may not be as quick and easy (that’s why payday lenders are so successful) but they cost quite a bit less in the long run. They include:
Personal Loan: Most banks or credit unions offer personal loans (sometimes called unsecured loans). Even if you have poor credit, many financial institutions will approve you for a small amount, although you’ll have a higher interest rate. But even if you don’t get the best rate they offer, you’ll never end up with the 200% + rate that you could end up with at a payday lender. Plus, you won’t have to pay the loan off in two weeks to avoid going broke. Instead you get a nice, reasonable monthly payment you can work into your regular budget.
Overdraft Protection: I never recommend getting overdrawn if you can help it. But if you have overdraft protection on your account, it usually functions like a line of credit. When you overdraw your account, the funds are taken from your overdraft protection product and it becomes a personal loan that you can pay back monthly. This also helps you avoid those pesky Nonsufficient Funds fees.
Increasing Income: I know, it’s easier said than done sometimes. But if you are able to pick up a part time job, it can make all the difference. You may even be able to find temporary or freelance work just to get you through the tough times. Here in Nevada, we have some great resources such as Nevada JobConnect that can assist you in looking for new opportunities, cleaning up your resume and more.
Rainy Day Funds: Obviously this one is a preventive measure, not a reactive one. If you’re headed to the payday lender, chances are good you don’t have an emergency or rainy day fund built up. But it’s never too late to start one, and thereby avoid the temptation to visit the payday lender during future emergencies. Some employers even have emergency fund programs that allow you to deduct a small percentage of your paycheck to build up this account for when you need it. I know, we all feel like we don’t have enough to save. But if you cut a few corners here and there (check out some ideas here, here, and here) and put aside even a small amount every paycheck, you won’t regret it next time the transmission falls out.
Low-Interest Credit Cards: While I never recommend making it a habit to live outside your means by using a credit card, they can be useful tools. Having a credit card set aside for emergencies, for instance, is a way better option than going to a payday lender. Credit card interest rates are usually pretty reasonable, and even the higher interest cards are nowhere near the mind-boggling fees you can end up paying on a payday loan. Plus, many have reward programs to sweeten the deal.
Get Financially Fit: If you make decent money and still find yourself pretty regularly in a financial bind, there are some steps you can take to improve your situation. At Greater Nevada, we offer Free Financial Fitness counseling and other assistance to help set you up for future success. If you’re not a member, there are other resources out there for you. Taking steps now to educate yourself and build great financial habits will pay off in the long run.
Any tips I missed or payday loan horror stories you’d like to share? Comment here!