Some may think of payday loans as just another alternative lending method. Well, it is a dangerous last resort. The cost of the loan is so high, that some people are trapped into a cycle of debt.
For example, you might have seen a TV ad for a payday loan company that was offering a discount “20 to the dollar”, like it was a great deal. Let’s pack up the neighbours and let’s all get one. Well after the one time discount, they charge $23 for each $100 you borrow for a two week period. $23 out of $100. Well, that is 23%. People complain about VISA charging 20% interest. But wait. VISA charges you 20% per year. These payday loan services charges you 23% per two weeks!!! There are 26 two week periods in a year. That is 26 times 23%. That is 598% a year. That is, if you borrowed $100 from the payday loan company and you didn’t have money to pay it off, so you get a new $100 loan to pay the old loan off. And you did this for a year. You would end up paying $598 to have the privilege of using their $100 for a year.
If you thought you had problems making ends meet, wait until you start taking out payday loans.
Often people who uses payday loans do not have the luxury of qualifying of other credit products. But make sure before you do take out a payday loan, go to the credit unions or banks to see if you can get a personal loan or a line of credit. If your credit is fair, you can get a credit card. The interest rate now ranges from 10% to 20%. A far cry from 598%. If you have a relatively new vehicle that is paid off, borrowing against that will still be far cheaper. Consider paying your friends or relatives 20 to 30% interests before giving your hard earned money to the payday loan companies.
Government agencies in the US and the UK are increasingly looking into the payday loan business to protect consumers. Recently the US Consumer Financial Protection Bureau released a white paper on payday loans and the UK Office of Fair Trading has given the payday loan industry 12 weeks to clean up their act. In Canada, there isn’t much news, so borrowers beware. These products only work if you have the cash flow to pay off the debt in a short period of time; otherwise, you will be taking out new loans to pay for the old ones. It is a vicious cycle. Consider all other alternatives first.
