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Payday Loans Only Make Things Worse
By JLP | August 28, 2006
When I read articles like Desperate Consumers Pay For Their Plight by Ollie Reed, Jr., I am reminded that IGNORANCE IS NOT BLISS! I have a problem with predatory lending because for MOST PEOPLE it only makes their problems worse. I also have a problem with people using these “services.” I don’t care who you are: if you use a payday loan company or a car title company, you are asking for trouble. As the article states, for someone who is having problems makes ends meet, how are they going to come up with the extra money to pay back the loan? That’s the problem with loans of this sort.
The guy in the article got into trouble when he used a car-title company to borrow money so that he could pay his rent. He got stuck in a trap of not being able to pay off the loan so all of his payments were just going to pay interest. As you probably know, if all you can pay is interest, you’ll never pay off the loan. After paying on the loan a year, he was late with a payment and the car-title company came and took his car in the middle of the night. According to the article, he “learned his lesson” with car-title companies. Now he is only going to use payday loan companies:
“I pay $36 on a $200 payday loan,” he said. “It’s far easier to deal with than car-title loans, and I can pay my bills and feed my family. Payday loans have dug me out of some holes.”
That is one expensive loan! For each $200 he borrows, he is paying 18% interest ($36 ÷ $200 = .18 or 18%). If he can’t pay back the loan in time, he will have to take out another loan, which will make his interest rate even higher. Payday loan companies are evil.
Of course, the payday industry doesn’t see it that way:
Bob Barberousse, a lawyer who represents Select Management Resources, an Alpharetta, Ga., company that is one of the major owners of car-title stores across the country, said car-title and payday stores fill a vital niche.
“Most of these people can’t go down to the X National Bank and get a traditional loan,” he said. “Numerous people come in and say, ‘Without this, where would I get the money for an emergency?’ “
Sure pal! You say whatever you have to say in order to sleep at night.
One thing I found kind of strange about this article is the picture of the couple. I don’t mean to be nitpicky or judgemental but if this couple is really struggling, why are they buying cigarettes and spending money renting/buying movies? I’m guessing these folks don’t have a budget.
Topics: Budgeting | 10 Comments »
August 28th, 2006 at 1:04 pm
Payday loans are ridiculous. Thanks for continuing to raise awareness of this issue for others. I write about payday loans–and their evils–from time-to-time.
August 28th, 2006 at 1:09 pm
[...] Quick note: AllFinancialMatters has a great post about predatory lending. [...]
August 28th, 2006 at 1:22 pm
Car title loans are particularly awful – I know one woman who simply knew that her interest rate was “25%”. When she went to pay off the loan, she found out that it was 25% PER MONTH or 300% interest per year! That is absolutely predatory and unconscionable.
Regarding the photo in the article: Maybe they’re smoking because they’re addicted and they save money by renting movies instead of going to the theater. You can’t know from one picture whether this is responsible behavior or not. As much as people talk about the “latte factor” it’s pretty hard to deny yourself everything.
August 28th, 2006 at 1:28 pm
BD,
Regarding the photo: I realize that it is hard to deny ourselves of things. However, isn’t that what we have to do if times get hard enough? Are movies “needs?”
August 28th, 2006 at 1:54 pm
[...] AllFinancialMatters and Molly’s Brother both have great articles on predatory lending, check ‘em out! [...]
August 28th, 2006 at 2:45 pm
I have a related gripe with something that seems more legit, but is almost as bad: tax refund loans.
Lots of tax outfits have them, and since they always e-file, the tax refund is funded within a few days at worst. Tax refund loans often have a “processing fee” that amounts to a fairly big percentage of the refund itself, making the interest rate on the loan enormous.
August 28th, 2006 at 2:51 pm
Foobarista,
I agree! Those “refund anticipation loans” are a total ripoff. But, lower income people consider the $100 or so that they cost, a small price to pay to walk out with their refund that day. They want their money now!
The really sad part is that with a little planning, these people could be living on their refund throughout the year instead of over withholding.
August 29th, 2006 at 2:57 pm
I see this time and again just before people declare bankruptcy. Here in Canada, a class action was approved last year against a company (http://www.cbc.ca/story/canada/national/2005/04/26/payday-loan-050426.html) . The plaintiffs are “alleging that the industry gives loans with interest rates and fees that equate to 15,000 per cent a year”.
December 14th, 2006 at 11:51 pm
Nice and very informative site!
Although I am aware of the fact that payday loans do have high interest rates of typically $10 for each $100 that you borrow, for me, payday loans are helpful in times of absolute financial urgency, especially to individuals without an emergency savings fund or a credit card and has bad or no credit history.
To me, as long as you fully pay back your payday loan amount on time, paying $10 interest on every $100 that you borrow from a payday loan provider seems to me, a reasonable rate. For instance, if you obtain a payday loan amount of $200, then paying back $220 is not costly because it helped you in a time that you needed it most.
One example of a financial urgency is your due credit card bill and you don’t have the cash to pay for it. Note that on a $300 amount due on your credit card, you will generally incur late fee charge of $35 thus also making your credit card balance go beyond its limit and you would incur another $50 over-the-limit charge, for a total of $85 in interest.
Now if you acquire an online payday loan of $300 to pay for your credit card due, you would only be paying back $330, saving you $55 had you not paid your credit card bill on time.
For as long as you are certain that you can afford to fully pay your payday loan on time, a payday loan can be a smart move.
December 15th, 2006 at 3:11 pm
Agree with Maricar Lee. The typical payday loan fee is $15 per $100 borrowed. While that may sound like a lot, it’s not really when you look at the other options people have when they need a few hundred dollars and don’t get paid for a few days. Let’s say you have a bill due, but don’t have the money to pay it. Here are your options- write a check and have it bounce. My bank charges $39 for bounced checks. Or you can just wait and pay the bill late. Depending on the company, late fees can also be around $39. When you look at it that way, payday loans make sense. Otherwise, I guess people could try to borrow money from friends or family or take a cash advance on a credit card. I’m not sure what the charges are for that.