Millions of Americans are trapped by debt resulting from escalating interest payments.
It's so tempting. You need to borrow money just for a short time until the next paycheck comes. Or perhaps you're expecting a bonus in a few weeks. Or you've been hit with an unexpected bill that doesn't quite fit in your existing budget. But you're confident you can pay back the loan quickly. And, it's just this one time, right?
And before you know it, you've become one of the estimated 12 million Americans (according to the Pew Charitable Trust) who takes out a payday loan
(also known as a cash advance
or check advance loan
What's the problem with that? You could easily (and very quickly) get buried in debt
Why? Because payday loans
usually come with very high interest rates - typically 15% to 30%, which translates into an annual percentage rate in the triple-digit range. And they are usually due within a very short time period.
The allure of payday loans
, especially around the holidays when bills are higher than average, is that they are so simple to secure with very few qualifications or requirements. You simply give the lender a postdated check, which serves as an advance against your next paycheck, or authorize access to your bank account for the dollar amount of the loan plus the interest. And the lender immediately gives you cash.
Then the loan comes due. According to the Pew Charitable Trust, the average interest rate on payday loans is around 391%, which means a borrower will pay about $16.29 for every $100 borrowed. That interest payment multiplies every few weeks if the loan is not paid off in full. So within a matter of months, you would likely owe much more in interest than the original loan amount. This leads to a vicious cycle of continuing to extend the loan due to lack of funds and then racking up even more interest fees which can't be paid on time.
Recognizing the dangers of this debt cycle, some states have taken steps to regulate lending terms and rates even the amount of money that a payday lender can lend. In Ohio, House Bill 123 represents the latest effort to limit rates charged and dollar amounts that can be borrowed. At a national level, the Consumer Financial Protection Bureau (CFPB) continues to remake regulations that would include an "ability to repay" requirement.
In the meantime, consumers can take control of their own finances by avoiding payday loans. Alternatives include:
- Create a budget that eliminates unnecessary expenditures and focuses on building an emergency savings fund
- Negotiate a payment plan with your creditor
- Take a cash advance on your credit card (although interest rates on credit cards can also be high and start accruing on the same day of the advance, so limit how often you use this option)
- Request an advance from your employer in an emergency situation
- Borrow from family or friends (but be sure repay so as to not jeopardize the relationship)
- Consider a pawn shop loan in which you can use valuables, such as jewelry or electronics for collateral for a short-term loan
- Take advantage of your bank's overdraft protections
- Obtain a line of credit from an FDIC-approved lender
The information and recommendations contained herein is compiled from sources deemed reliable but is not represented to be accurate or complete. In providing this information, neither Cortland Bank or its affiliates are acting as your agent or is offering you any tax, accounting or legal advice.