Nikki Waller, Director of Financial & Relational Development
There are more payday loan centers than there are McDonald’s – that should tell you something about their profitability. Don’t be the one paying to keep the lights on at Kwik Kash.
And it’s not just Kwik Kash, there are a variety of payday loan options: Check Into Cash, Lending Tree, Check’n Go, Advance America, Payday Loans Evansville, Cashland, Cash Tyme, and many others.
A payday loan may seem like the ideal way out of a financial emergency if you have poor credit, no savings, and nobody to turn to for cash. But it can do a lot more harm than good, and it’s important you know what you’re getting yourself into.
What is a payday loan?
A payday loan is a quick way to get the cash you need to cover an unexpected expense. It’s called a payday loan because the loan balance is typically due on your next payday.
This seems incredibly appealing doesn’t it?
A lot of people feel that way. Approximately 1 in 20 households have taken out a payday loan.
Payday lenders will verify your income and a bank checking account. Once they verify your income you’re halfway to an approval. The only other step is to write a postdated check in payment of both the loan amount and the interest charged on it.
For example: let’s say you take out a $500 loan on July 1. Since the loan is required to be paid back in two weeks, you will write a check back to the lender dated for July 14. The check will be for $500, plus $75 in interest.
If that loan had been for an entire year, that $75 is only 15% interest. But the $75 is just the interest charge for two weeks. If you annualize the interest charged for two weeks, it comes to 300% - and that’s less than payday lenders usually charge.
Don’t be fooled. Payday companies present themselves as a way to get you back on your feet. They say they don’t want you trapped in debt – they say they’ll help you if you can’t pay them back. Sounds like a nice company, doesn’t it?
What they don’t tell you is their business model depends on you not paying your loan back.
Three quarters of the industry volume is generated by borrowers who have to reborrow before their next pay period.
It’s when you start missing payments that you’re susceptible to fees and payments you weren’t aware of.
The average borrower takes out 10 loans and pays 391% in interest in fees. 75% of the payday lenders revenues are generated from these repeat borrowers. Some of these rates are, legally, as much as 1,900% per year.
To help you understand what this means, we put together a graph for you (we LOVE graphs)
Still doesn’t change your mind? What do you do when you have these payments coming out of your checking account and another emergency comes up? Well, why not take out another? One payday loan creates the need for a second, and a third, and a fourth, and eventually you realize that you’re stuck.
In one year, that same $500 we discussed earlier can cost $1,950 in interest.
What if you paid yourself that interest, in a non-financial emergency time, and put it into your savings account instead. Let me tell you what that means for your savings account, it means no more financial emergencies.
There are so many options there are services that will connect you to the payday loan that will best suit your needs. (Cue Montel Williams)
To be fair, payday loan companies say this is a short-term loan, so an APR doesn’t apply – IF you pay them off immediately.
If only there were a payday loan company, that offered small loans at a low interest rate with payments spread over a 12 month period that would serve as an emergency cash option as well as a credit building tool..
*HOPE staff puts on thinking cap*