Many people in power want to stop the practice of issuing payday loans in its tracks. At various times, even the U.S. Department of Justice and several state regulators have gone after those who lend small amounts of money to working people with a promise of paying the money back the next time their employer pays them.
The oft-stated reason for their objection is the high-interest rates charged, which they claim is exploitive. It’s difficult to see their point; in fact, for those who live in areas of the country without banks or other mainstream financial services available, payday loans can seem like a lifesaver.
Payday Loans Are Popular Because They Help
According to statistics, as many as 80 percents of American families are living paycheck-to-paycheck. Too often, people run out of money before they run out of the month. That means they need a source for some quick cash; sometimes as little as a few hundred dollars. Critics can criticize the high annualized interest rates all they want, but then a family breadwinner needs $200 to keep the power turned on, they don’t see a 400% annual interest rate, they see a $25 fee, which seems like a small price to pay to keep the heat or the air conditioning on.
Advantages of Payday Loans
When someone needs a little cash quickly, and they still have a couple weeks before they get paid, they may consider a payday loan as an affordable source of short-term financing. They are easy to get, don’t require a credit check and they can be easy to pay off if used correctly. They are often more easily accessible than a personal loan or a credit card cash advance, which makes them a desirable source for cash in an emergency situation.
The Potential Downside to Payday Loans
Though there are indeed benefits to payday loans, it is essential for everyone to understand that, as high as Payday Loans can be to meet short-term needs, it is also crucial that those who borrow from payday lenders do so in a responsible way. The repayment period is based on how frequently the borrower gets paid.
In some cases, the person taking the loan is required to provide a post-dated check for the amount due plus a fee, and in all cases, the borrower signs a contract. If the due date comes and you find yourself with more month than money once again, most lenders will allow you to extend, by paying the fee again. Then, you will have until your next payday to pay the loan in full or pay the fee again for another extension. And on it goes.
Payday loans are a convenient way to get money in an emergency, but that convenience will cost you. While it may be unfair to refer to the fees in terms of annual percentage rates, you still need to keep in mind that the charges are still generally in the 15-30 percent range, which is not bad when you pay off the loan on your next payday. However, if you keep extending the loan, the fees can add up quickly. Consider the example of a $200 loan with a $25 fee.
If you get paid every two weeks and you extended three times, you have effectively paid $100 to borrow $200. If you are living paycheck to paycheck, when you pay that final $225, that can represent a significant hit to your bank account.
Beware the Debt Cycle
The worst thing that can happen to a borrower is to fall into what is known as the “vicious cycle” of always having to extend the loan. You may keep the power on, but the $200 you borrowed to pay the gas and electric company can quickly turn into $300 or more, which can make it harder to pay the next gas and electric bill, as well.
Some people turn to use another payday loan to pay off the first one, which means they are continually using borrowed money, with the fees steadily piling up. It can be a vicious cycle and the longer it goes on, the harder it becomes to end it.