Payday loans may seem like the perfect solution during financial hardship. Many of us have used these short-term cash advance loans to pay for emergency expenses or cover utilities in between paychecks. But a new study of interest rates and consumer debt suggests that payday loans really don’t pay off.
The Consumer Financial Protection Bureau recently released a new report indicating that payday loans might actually be making life a bit more difficult for consumers that use them. Since payday loans carry very high interest rates, these loans are trapping more and more consumers in vicious cycles of debt.
How Payday Loans Work
A payday loan is a small “instant” cash advance that’s meant to tide you over until your next paycheck. We’ve all had instances where we suddenly need a bit more money than we have available at the time. During a financial crisis, you’ve got the option of going to a payday loan or “cash advance” outlet to get the extra money you need.
If you can show that you’ve got some source of income (so the company knows you’ll be able to pay them back relatively quickly), you’ll be able to quickly get a modest little loan to cover whatever emergency needs covering.
The problem, however, is that these loans carry extremely high interest rates which can make them hard to pay off. They often seem to trap consumers in a vicious cycle of debt and constant repayment.
Most consumers want to pay these loans off as quickly as they possibly can. In fact, these loans are specifically marketed to consumers as temporary financial solutions. But unfortunately they rarely wind up being short-term.
As Richard Cordray of the CPFB notes:
“There is a high sustained use—which we consider to be not only when a consumer rolls over the loan, but also when he pays it off and returns very quickly to take out another one.”
Taking a Look at the Payday Loan Numbers
The facts and figures associated with cash advance loans aren’t very pretty, either. However, they make it a lot easier to understand how dangerous the payday loan game really is.
There are a lot of other ways that you can go about coming up with money on a short-term basis. If you do have to make use of a payday loan, it’s going to be in your best interest to make sure that you only solicit this kind of financial service once.
Using a payday loan more than once or twice might actually result in some relatively serious debt that can wind up chasing you throughout the entire year.
In fact, the Consumer Financial Protection Bureau’s report found that the payday loan industry causes people to be in debt for about 200 days out of the year, which really doesn’t sound like a solution to a financial hardship.
As this nifty infographic points out, the majority of these payday loans average $350. This doesn’t seem like a huge amount, but it’s pretty amazing to consider that, on average, about $457 in fees comes along with it.
Why? Well, it’s because the typical APR on one of these loans is a whopping 300%.
It’s becoming more and more clear that these loans were practically “designed” to keep consumers in a repeating cycle of debt.
Even major banks are getting in on this type of action. Many of them, including Wells Fargo, offer “deposit advances,” which are pretty close to a payday loan.
What Do You Think About Payday Loans?
We suggest that temporary cash relief should be avoided unless it’s an absolute emergency. Short-term cash advance loans come with incredibly high interest rates that are only going to suck you further and further into debt.
If you really need fast cash and there are no other options available to you, make sure that you read the fine print before entering into any financial agreement with one of these lenders.
Be extra careful if you’re applying for payday loans online — many short-term Internet lenders are associated with affiliate marketing companies like Premier Membership Clubs, one of Scambook’s all-time top complaints.
So how do you make sure that you’re not getting taken for a ride when it comes to things like credit cards and loans? Let us know in the comments!