The Truth About Payday Loans & Alternative Loan Options
Did you know that Ohio has a payday loan usage rate of 10%, the third-highest rate in the country? If you need some cash quickly, and are thinking about getting a payday loan, think again. Learn the truth about payday lending and explore several alternative personal loan options that are a smarter choice.
What is a Payday Loan?
A payday loan is a short-term loan that’s often advertised as a way to quickly get small amounts of cash ($100 - $1,500) for an emergency. Payday loans use a post-dated check or access to your checking account as collateral, and are also commonly referred to as cash advance loans or check advance loans. Some payday lenders will deposit funds directly into your checking account, issue a pre-paid debit card, or fund you by check or cash.
Typically, your loan will be due on your next payday or within thirty days. When borrowers give direct access to their bank accounts or a post-dated check, the lender will use that access to collect the loan amount and fees, and are first in line to collect. This often puts borrowers at higher risk of not being able to cover other bills, forcing them to take out a new payday loan to cover expenses.
Payday Loan Fees
According to the Consumer Financial Protection Bureau (CFPB), payday lenders charge fees ranging from $10 dollars to $30 dollars on average for each one hundred dollars borrowed. For example, if you take out a payday loan for two weeks with a $15 dollar per hundred-dollar fee, you’ll pay an APR of 400%. To compare, most credit cards charge interest rates ranging from 10% to 30% on the high end. This astounding interest rate is what can make payday loans very dangerous.
The problem is that many people who can’t get approved for a credit card because of their credit history, will end up turning to alternative financial services like payday loans. Then, if they can’t afford to pay them off when the loans become due, they roll the first loan over into another payday loan for additional fees. And that’s how the endless cycle of debt begins to snowball, making them very hard – and very expensive to pay off. In fact, Pew Charitable Trusts found that on average, people are in debt for five months and pay an average $520 in interest, above the original loan fees.
Payday Loans in OH, MI and IN
Payday lending regulations and usage differ by state. Twenty-seven states including Ohio, Michigan and Indiana allow for single-repayment loans with APRs of 391% or higher. Nine states are considered hybrids, where they allow payday loan storefronts, but impose tougher regulations, like lower fees and longer repayment periods. Currently, there are fifteen states that have no payday loan storefronts. To see the regulations and usage rate for your state, use Pew’s interactive map.
Payday Loan Facts
Several agencies including the Consumer Financial Protection Bureau and Pew Charitable Trusts have been studying this industry closely and reported that:
- 58% of payday loan borrowers have a tough time paying their monthly expenses for at least half the time
- Only 14% of borrowers can afford to repay an average payday loan
- 76% of payday loans are renewals or quick re-borrows – one in five borrowers had to re-borrow within thirty days, incurring additional fees with each renewal.
In addition, their research found that over half of borrowers overdrew their checking account in the past year, and 27% of the borrowers overdrew from the payday loan, causing the fees on the borrower to further add up and putting their bank account at risk. Furthermore, The Center for American Progress reported that payday lending takes place disproportionately in vulnerable communities.
The CFPB has proposed new rules to end these debt traps, working to force lenders to determine if borrowers have the ability to repay the loan, and to stop the abusive practice of making multiple debit attempts that rack up fees and NSF (non-sufficient funds) charges from the borrower’s bank account.
Alternatives to Payday Loans
If you are in a tough financial position and are considering a payday loan, please consider these alternatives:
- Take out money from savings: If you have a savings account tap into that first. Once you’ve weathered the financial storm, be sure to save again for another rainy day.
- Contact your creditors: If you can’t pay your bills in full and on time, many creditors will work with you to reduce the amount due or give you more time to pay. Always avoid paying bills late, because that will hurt your credit score.
- Cut your spending and bills: Another option is to cut out frivolous expenses, like your daily coffee or cable bill. Examine your spending closely to see what you can live without, if only until you get back on your feet.
- Use your credit card: If you have a credit card that’s not maxed out, consider funding your expenses with that for the short-term. Before you do so, confirm your interest rate so you can prepare. And, be careful not to make this a habit and put yourself into long-term debt.
- Talk to your employer: Another option is to ask your boss or HR department if they can help you out with an advance on your pay. You could also ask to work overtime, adjust your tax withholding to get more money in your check, or find a second job or freelance work.
- Sell items: If you’re in a crunch, try to find some things that you own but no longer need. Sell items online, at a pawn shop or consignment store, or have a tag sale.
- Work with a credit counselor: If you are facing a bad financial situation, there are credit counselors available that can help you figure out a plan, negotiate on your behalf, and get you back on your feet.
- Take out a small personal loan from your bank: If you have decent credit and a job that provides a steady stream of income, talk to your bank to see if you can qualify for a small personal loan. These loans will have much lower interest and more reasonable repayment terms.
Payday lending can sound like a quick fix when you are faced with an emergency. However, these loans can saddle you with debt for much longer than expected, prolonging the hard times and potentially making your financial situation worse. If you are faced with financial difficulty, please contact us at First Federal Bank– we’d be happy to work with you to help figure out your options.