You might have seen one of those stores in your neighborhood. You might have even walked past few of them. But have you ever wondered what do these stores do? How do they work?
Well, these are commonly known as payday loan stores or cash advance stores. In our country, the creditors usually operate through these stores generally in the low-income neighborhood areas.
What Are Payday Loans?
Payday loans are basically unsecured debts for a small amount and short repayment period. The loan amount is generally due on your next pay check. Most of the time, a typical payday loan (pdl) ranges between a $100 – $1000.
The creditors offer these short-term loans with very high interest rate. And generally, repayments are made in one lump sum. But you can opt for loan renewals, only interest payments, etc. depending on your creditor.
According to paydayloaninfo.org, 32 states in the US have authorized high-cost payday loans, failed to close loopholes exploited by the industry to make high-cost loans, or deregulated small loan interest rate caps.
At the same time 18 states and the District of Columbia prohibit extremely high cost payday lending.
How Payday Loans Came In To Being?
The introduction of pay day loans in the US dates back to the 20th century, The exact date of which cannot be confirmed.
Before 1956, taking out small loans was prohibited in the US. So, with the passing of the Senate Bill in 1956, it became legal. By 1980, people in the US started becoming familiar with pawnbrokers and loan sharks.
But during that time, the payday loans were usually known as “check cashing services” as the term didn’t comply with usury laws.
The pawnbrokers offer loans in the US even today, however their numbers haven’t been on the rise. You can opt for a loan in exchange for a collateral, like jewelry, musical instrument, etc.
In 1993, an American businessman named Allan Jones, founded his company called Check in to Cash, to offer short term loans. Thus, payday loans emerged more importantly during the time. These loans got legalized in 1996, making his company as the largest one of these sectors in our country.
Internet services in the US emerged in the 1990s and businesses started utilizing it for maximizing theirs profits. Since then, with the inception of online pdl, it has become even more easier to avail these loans.
Things To Consider Before Applying For Payday Loan
Before taking out a payday loan, make sure you meet the following eligibility criteria:
- You should be above 18 years of age.
- You should have income proof.
- You must have a valid phone number.
- You should have an open and active checking account.
- Be able to share personal details including Social Security Number (SSN) and Taxpayer Identification Number (TIN).
Payday Loans can be helpful to you in many ways like:
- You get fast loan disbursement for any kind of emergency.
- Your credit report is not checked.
Taking out payday loans is easy, but repaying is not! This is the bitter truth of the payday loans. If you are in dire need of cash, payday loans can rescue you from that situation. But the interest levied on these loans is unbelievably high.
A study by the Consumer Financial Protection Bureau (CFPB) in 2014 revealed that one out of five payday loans is renewed within 14 days. According to Pew Research Center, a non-profit research center, found that generally it takes about 5 months to pay off the payday loans.
As the payday creditors give you loans for a short period of time and that too with nominal documentation, they charge you high interest.
An instance shows, a Kansas City man had to repay $50,000 and lost his home after taking out a payday loan of mere $2500. Isn’t that ridiculous?
As an example, let’s calculate the APR on a $1,000 payday loan with a 14-day term that charges $20 for every $100 you borrow.
- Divide the total loan ($1,000) by 100.
- Multiply the result (10) by the fixed fee ($20) for every $100. This is your finance charge.
- Divide the finance charge ($200) by the loan amount ($1,000)
- Multiply the result (0.2) by the number of days in the year (365)
- Divide the total (73) by the term of the loan (14)
- Multiply the result by 100 and add a percentage sign
The result: ((($200 / $1,000) x 365) /14) x 100 = 521.42%.
Payday Loan APR = ((Loan Fee/Loan Amount) x 365)/Loan Days) x 100
As you can see, taking out a loan of $1000 loan for 2 weeks can cost you $200 in finance fees and an APR of 521.42%.
On the contrary, credit cards usually have 25% APR.
You will be shocked to know about the APR of payday loans in different states. Some states like Texas, Nevada, Utah, have an APR of payday loans that are as high as 662%, 652%, 658% respectively.
You can have a look at the high interest rates of payday loans from different states of our country.
Calm down! Don’t Be A Victim
A 2014 Consumer Financial Protection Bureau (CFPB) report says that most of the borrowers renew their loans a number of times. As a result, you end up paying much more than the actual amount.
As you can see, pdl loans can be a debt burden, leaving you stressed.
But relax! To get rid of this debt trap, you can opt for some debt relief options.
1. Debt Consolidation
In this debt relief option, all your unsecured debts get consolidated into a single monthly payment.
Usually, unsecured debts like payday loans come with a high rate of interest. But opting for consolidation might reduce your rates of interest and hence it gets relatively easier to pay off.
2. Debt Settlement
Have you started getting collection calls? Are you not in a position to pay off your outstanding balance? You might be in a financial crunch or too much debt. As a result, shortage of funds might restrict you from paying off your entire outstanding balance.
But no need to worry! Debt settlement can help you out! Opting this, you can negotiate with your payday creditors or collectors to reduce the payable amount.
But debt settlement is quite a hectic process. So, you might feel stressed out while negotiating with your creditors.
In that scenario, you can go with a genuine debt settlement company for settling payday loan debts. They will negotiate with your creditors on your behalf and try to reduce the loan amount(s). But remember, these services come with a professional charge.
In case you have opted for an illegal payday loan, then you just have to pay the principal amount! So try to stay the hell out of them.
How To Avoid A Payday Loan?
A study by Pew Research shows that, in the US, about 12 million people opt for payday loans every year. Most of these people are young and have an income of less than $40,000 per year.
We know that it’s impossible to predict our future. So, it’s not possible to handle every situation and you might run out of funds.
Generally, people tend to take out payday loans as they are easier to opt for and offers quick disbursement.
But instead of getting vulnerable to a debt trap by opting for payday loans, you should try your best to stay away from them. Try following these approaches to avoid falling for a payday loan trap.
1. Create a Budget
The best way to avoid debt trap is to create a budget and strictly follow it. Note your income from all sources along with your expenses every month. Now, plan your expenses based on your total income. This makes you budget savvy and less likely to opt for a payday loan.
Also, create an emergency fund so that you can tackle your rainy days without having to take out a payday loan.
2. Approach Banks and Credit Unions
Sometimes banks and credit unions offer short term loans to the eligible customers.
Here are some key differences between a payday loan and a normal bank loan. This might help you to make a better decision before opting for a loan.
|Payday Loan||Bank Loan|
|Usually for smaller amounts like $100 – $1000.||Usually for a higher amount.|
|The repayment period is short like 14 days.||Repayment period is comparatively long.|
|A pdl comes with a very high APR.||It has a much less APR.|
|Credit check is not required.||Credit check is an important parameter to opt for a bank loan.|
|You can’t opt for installments.||You can opt for installments to pay off your loan amount.|
3. Loan Against Life Insurance
Yes, you heard it right! If you have any life insurance policy, then you can opt for a loan against it.
The repayment time for this loan is relatively long. And if you fail to pay off this loan, the insurance company will deduct the loan amount from the maturity value.
4. Ask For An Early Paycheck
If you are eligible for an early pay check, you can have a talk with your boss. This might save you from falling into the payday loan debt trap.
It never hurts to reach out to your boss to ask for a salary advance.
5. Use Your Credit Card
You can go for cash advances by using your credit card. It has got a relatively lower interest rate than payday loans.
6. Reach Out To Friends and Family
You can take out a loan from one of your family members. But be sure about the repayment time. In case you are late, it might affect your relationship.
Still, payday loans are an easy option if you need fast cash for an urgent situation. But make sure to pay off the same on time to avoid getting into the debt trap.
Hence I would highly recommend to weigh in your options before you opt for one. Tread cautiously and avoid a payday loan if you can.
Good Nelly – Personal Finance Blogger
My Way Of Viewing – My brainchild. It’s primarily a financial blog, since finance has been my expertise for years now. Everyone views life in his/her own way and mywayofviewing.com is how I view this world – primarily this financial world – its happenings, changes in money management strategies, unique ways to save money, having a life free of debt, and so on.