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Payday Loan / Cash Advance Places

by Keith Rawlinson
Volunteer Budget Counselor

I'm starting to see them everywhere--payday loan and cash advance places.  I see them in television commercials regularly: the financially strapped, broke couple whose car breaks down and they have no money for the repairs.  So, they go to the payday loan place, write them a check to be held until next payday, and walk out with a loan in the amount of the check minus the fees for borrowing the money.  The commercials even say they are there to help when people are in trouble and need cash fast.  The commercials make it sound like this is what smart people do when they are in financial trouble; in fact, one payday loan place even has the word 'smart' in their name!  Are these places really there to help?  Is it really a smart way to deal with financial troubles?  Absolutely not!  

An 800% return on the money...for them anyway.

The first reason not to use these places is the outrageous fees and interest they charge when they lend you money.  In many cases, they don't even call a lot of what they charge 'interest' since that puts them under all kinds of legal constraints.  They call it fees.  They give the fees various names, but they are still fees.  When you add up all of the 'fees' plus any interest they may be charging, you are paying the equivalent of somewhere around 400% interest to borrow this money!  If you are late with repayment, they add in a bunch more 'fees' that brings what you are paying up to the equivalent of about 800% interest or higher!

Just for a quick, made-up example, let's say you borrow $500.  The fees only add up to 10% of what you are borrowing which comes to $50 in fees.  So, you write them a check for $550 which they  hold for one week (until your next payday) then cash the check to repay the loan.  It's only 10% which is only $50 and that doesn't sound like a whole lot when you need the money to get out of trouble.  But wait, that 10% was to borrow the money for only one week.  If you figure out the annual percentage rate on that, you are paying over 500% annual interest!  That's like going to the bank and taking out a loan with a 500% interest rate.  Or, it's like putting a $500 charge on a credit card that charges 500% interest.  Would you do that?  I hope not.  But that's what you're doing when you take out a payday type loan.  By the way, to be perfectly honest, it is technically illegal to even write a check when you know there are no funds to cover it; but that is exactly what these places are asking you to do.

So, are they really there to help you?  No way!  They are doing this because they get a 400 to 800 percent return or more on the money they lend out.

Get money now...repay later...with what?

Another big problem with these payday loans is this:  if you are so financially stressed, so broke that you need to get a payday loan in the first place, where is the money going to come from to repay the loan a week or a month from now?  They tell you that it comes from your next paycheck, but, if you are broke and financially strapped, you are going to need every penny from your next paycheck.  If you didn't need all of your paycheck to meet expenses and payments, then you would have money left over from previous paychecks and you wouldn't need a payday loan to begin with.  You may feel like you're solving a money problem now, but it will be a much bigger money problem when the loan comes due and you can't pay it.  And as soon as you can't pay the loan back, they add in a whole lot more fees and now you owe even more money that you have no way to repay.  I've even counseled people who have done exactly that, then ran out and got another payday loan to pay off the first one.  They haven't really paid it off, they just moved it to another payday loan place.  Then, in the meanwhile, another financial emergency comes up and they borrow that from the payday loan place as well.  Now they have two loans they can't repay and are in even more trouble.  You think you're in financial trouble now, just wait and see what happens when you get involved with these payday loan places!

Predator and prey.

A predator is an animal that eats another animal alive.  The prey is the animal that gets eaten.  In my opinion, what these payday loan places do is predatory lending.  Predatory lending is when a lender takes advantage of someone who is desperate and ignorant enough to borrow sums of money at very, very high interest rates.  Some predatory lenders even try to get you into so much debt that you can never repay it completely, you just keep sending them payments every month for the rest of your life.  The payday loan places are the predator...you are the prey.

Think about it, where do you generally see these payday loan places?  Do you see them in the upper class neighborhoods?  Do you see them next door to expensive boutiques in the high-end shopping district?  Do you see them where all the rich people live?  No, you don't.  You see them in the poor neighborhoods.  You see them near the liquor stores.  You see them near the pawn shops.  You see them anywhere that broke people hang out.  Why?  Because these payday loan places know that anyone with any money and any financial smarts is not going to be desperate and ignorant enough to use payday loan places.  Now understand that ignorant does not mean stupid.  Ignorant simply means that someone doesn't know much about it.  I counsel many very intelligent people who are ignorant when it comes to handling money.  These payday loan places don't care how smart you are, they care how desperate, broke and ignorant about money you are.  

Fine, so what's the answer?

In counseling, I'm not one to tell people what they should not be doing without telling them what they should be doing instead.  So, if you aren't supposed to use payday loan places when you have a financial emergency, what are you supposed to do?  Well, if you are using payday loan places, then one thing is for sure: you need to read my article entitled  You Need Savings.  If you really think about it, most people borrowing from these payday loan places start by borrowing somewhere around $500.  Well, if you had $500 saved up for such emergencies, you wouldn't even need a loan would you?

My advice to you.

If you are using payday loans, or considering using them, or need to get them paid off and get rid of them, then here's my advice to you.  Read all of my numbered articles.  If you are really serious about eliminating financial stress, eliminating debt, and getting to the point that you never need a payday loan again, then you really need to take the time to read all of those numbered articles.  Read them in order starting with The Secret To Becoming Wealthy.  Take it seriously and really be determined to follow the advice and make the rest of your financial life much, much better.  You can do it.  I have and so have thousands of other people.  Start making yourself wealthy instead of making the payday loan places wealthy.


Please know that all of the thoughts, information, suggestions and techniques given on this site are nothing more than the author's opinion on the matter being addressed.  Do further research before making any decisions.

This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.
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