Why Payday Loans Don't Work

                                                   

Payday loans also known as cash advances, title loans, check advance loans, post-dated check loans, or deferred deposit loans are promoted all day long - on the radio, television, the Internet, postal mail, email and social media. Allan Jones founder of Check into Cash invented the payday loan industry in 1993.  Wells Fargo is the largest lender that offers payday loans. Payday lenders target communities of color and low-income consumers. Payday lenders are less reputable than commercial banks.

If an unexpected emergency arises that has to be paid immediately and you don’t have any savings or a credit card many consumers resort to using payday loans.  Payday loans can be obtained for $50 up to $1,000 or higher depending upon specific requirements. To receive a payday loan you are required to write a post-dated check for the amount you wish to borrow plus any fees for using the payday loan.  The money minus the fee is provided immediately into the consumer’s bank account the next day. The next time the consumer gets paid the lender accesses their bank account to process the post-dated check and withdraws the amount owed plus the fee.

Payday loans are attractive to consumers due to aggressive advertising, lack of education and knowledge about the consequences of using payday loans consumers think they are getting ahead but they are really getting further behind. If you don’t have the money to pay your bills, you also don’t have money to repay the payday loan. Many consumers choose to use payday loans because they have or have had access to credit but are unable to get approval for a loan or credit card and have little to no savings. Payday loans do not require a credit check or other forms of verification.

Payday loans are banned in the following states: Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, Washington DC and West Virginia. In some states, the high interest rates charged by payday loan companies are illegal. If the primary residence of an individual is in one of those states, the consumer may not have to pay back the balance of the loan because it was originally offered illegally.

Payday loans are structured to keep consumers in debt because they have high fees, short term due dates, balloon payments, and have access to a borrower’s checking account. This results in consumers borrowing additional money to pay back payday loans.  Some payday loan lenders offer no-cost loans to new borrowers although they know that most borrowers will not be able to repay loan and will be charged a default fee.  Payday loans lenders operate as collection agencies and must adhere to the Fair Debt Practices Collection Act when collecting on a debt.

The consequences of payday loans are:

1. If you don’t have the money in your account on payday you will be charged additional fees.
2. If you don’t have the money in your account you will be charged an overdraft fee by your bank.
3. You will be at risk for writing a fraudulent check which is a federal crime.
4. Banks may cash checks prior to the post-date on a check and you are responsible for paying the bank fees charged.
5. Payday loans have high interest rates with a common default rate of 6% (interest rate charged if you fail to pay according to the terms of the loan). 
6. If you borrow $100 and are charged a $15 fee for a 14 day (2 week) payday loan the annual percentage rate charged for the loan is 26 x 15% = 390%. If you do not have the money in your account, the payday loan is extended for an additional $15, so you now owe $130 for borrowing $100. The consumer will continue to be charged a fee until the loan is repaid in full. This may not sound like a lot but compared to using a credit card it is.  For a credit card with a balance of $5,000 at 11.75% interest rate your monthly credit card payment is approximately $158.
7. Security and fraud risks may occur because payday loans companies are not regulated.
8. Some payday loan lenders report to the credit bureaus.
9. Payday loan lenders will continue to access a consumer’s account to obtain repayment of the payday loan. This causes multiple overdraft charges and could result in their bank account being closed and may not be able to open another checking account.
10. Your payday loan account may be sold to a collection agency.
11. If you default on a payday loan you may be sued by the payday loan lender for the loan amount, fees and court costs. If the lender wins the court case a judgment will be filed and the lender may put a lien on your property, seize your checking account, real estate, or personal property to satisfy the judgment.
12. The payday lender may not be licensed in every state and may make false threats such as taking you to jail or taking you to court which is illegal. You cannot go to jail for defaulting on a payday loan.  A payday loan lender cannot take you to court if you live in a state where payday lending is banned.
13. Ninety-percent of online payday loans companies are not licensed.
14. Payment arrangements are available but are not offered to eligible consumers so payday loan lenders can make more money.
15. You may be forced to file for bankruptcy.
16. You may become delinquent on other debts.
17. The default payment plan for most payday lenders is setup for consumers to pay the finance charge only which does not reduce the loan principal.  Consumers must notify the payday lender to retrieve payment in full during one payday cycle when repaying the payday loan.
18. Once a payday loan company has a consumers’ bank account information they can access their account for repayment at any time without the consumers’ permission.
19. A payday lender may use illegal collection methods to obtain repayment of payday loans.
20. A payday lender may call you repeatedly at home, work or on your cell phone to obtain repayment.

Here are 13 alternatives to obtaining a payday loan:

1. Contact the payday lender’s headquarters office to setup payment arrangements.
2. Notify your bank and the payday lender by providing specific instructions in writing on when or how your account should be accessed when writing a post-dated check.
3. Contact your family, friends, your church, social, government or civic organizations to receive emergency financial assistance.
4. Create an emergency fund to cover your monthly bills and expenses for 9-12 months.
5. Maintain good credit.
6. Create a budget and stick to it.
7. Contac the lender immediately to setup a payment plan if you are unable to repay the payday loan.
8. Repay the payday loan or time or prior to the due date
9. Contact other funding sources such as peer to peer lending companies such as Prosper or Zopa.
10. Contact a consumer credit counseling company or financial coach to help you examine your spending and develop a plan to repay your debt.
11. Work overtime.
12. Get a part-time job.
13. Reduce spending by 30% by downgrading or downsizing your lifestyle.