When you’re living paycheck to paycheck and an emergency comes up, one option made available to people are payday loans. A payday loan is a small, short-term cash advance designed to be paid back on the borrower’s payday. Sounds pretty convenient, right? Well there’s a lot more to it than simply taking a loan and paying it back with your paycheck. The CGS Team is giving you the skinny on payday loans and determining if these cash advances are a friend or foe to you!
The Skinny on Payday Loans
As mentioned above, a payday loan is a short-term loan linked to a borrower’s payroll schedule. Essentially, a borrower fills out a loan application and provides ample evidence of employment and pay salary. Typically, the loan amount is a percentage of your take-home pay.
This is because the lender wants to ensure your paycheck will cover the loan balance when it becomes due. Rules and legislations around payday loans vary between states. Often times though, people can be approved regardless of their credit history. This is because payment is due in full on payday.
Once a person completes the application process, the approved loan amount will be direct deposited into their account within a few business days. The loan is due in full on the person’s next payday, and is typically direct deposited out of the same account the loan went into. There are also fees and interest associated with these short term loans. Continue reading to really understand why these loans may not be your friend
Let’s Talk Interest
Although payday loans are very short-term, the interest rates on these cash advances are astronomical! Not only are the interest rates high, but lenders often charge a processing fee that can vary in price. In most states, there is a limit on the amount of APR a lender can charge. The average payday loan charges 36%-40% APR per loan.
That means you will be paying almost HALF of what you borrowed back in interest, in addition to the borrowed amount. To put that number in a different perspective, let’s compare other debts. Mortgages typically have an interest rate of 1.8%-8%. Auto loans typically range between 4%-10%, and credit cards often range between 10%-25%. That means that a credit card is less costly in interest than a payday loan.
Ultimately a Friend or Foe?
According to a study by The Pew Charitable Trusts in United States, “Most payday loan borrowers are white, female, and are 25 to 44 years old. However, after controlling for other characteristics, there are five groups that have higher odds of having used a payday loan: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced.”
That is extremely unsettling, ladies. That means that people of certain backgrounds are not making enough money to cover their expenses and are taking out payday loans to help get them through their paycheck cycle.
Related: 4 Loan Types to Tread Lightly With
If you are in a bind and there are no other options, a payday loan is available to you. However, after seeing the interest rates, payday loans are not your friend! Much like credit card debt, it’s very easy to fall into the trap of using payday loans to get you out of the struggle that they caused in the first place. If you do plan to take one out, proceed with caution.
Do you have any experience with payday loans? What type of interest did they charge you? Did you find yourself taking out more and more payday loans to get by? These loans can be dangerous, and your experiences may help a CGS member in the future! Leave a comment below to share.