It's not like anybody loves taking out a payday loan.
In fact, few industries are less popular than payday lending. Starting earlier this year, the U.S. Congress and state governments began a relentless barrage on payday loans, trying to legislate them out of existence. Some states have succeeded. And these lenders aren't much more popular with their own customers. According to a recent study by the Pew Charitable Trust, the majority of payday loan customers say these lenders take advantage of them.
So if everyone dislikes payday loans so much, then why did the same study find that a majority of payday loan customers also admitted that these lenders provide relief? Why did a George Washington University study find that 89% of payday loan customers were very or somewhat satisfied with their most recent loans?
Because a large group of Americans need payday loans to get from paycheck to paycheck, as much as they dislike their dependency on them. More than half of U.S. households have less than a month's worth of savings. Seventy percent don't have or don't qualify for traditional banking institutions. When their income falls short or a crisis hits, these Americans turn to the one place that will deal with them: payday lenders.
But just because these borrowers get desperate doesn't mean they have to make choices that will hurt them even more down the road-the kinds of choices that can cost you thousands of dollars a year.
Fortunately, there are ways to take advantage of payday loans without ruining your finances. If you need to use a payday loan to make ends meet after an emergency or until you get back on your feet, here are five mistakes you absolutely must avoid to keep from paying more than necessary on your payday loan.
Yes, payday loans are easy and convenient, but they're also expensive, with the average two-week loan of $375 costing about $500 over the five months of debt such a loan usually causes. So, before you run to your local payday lender, it's a good idea to stop and look at your other, less expensive options.
Of course, the first place you should look for additional cash is in your budget. Are there places where you're spending on unnecessary items-entertainment or premium clothing purchases, for instance? Weed these out, if and when you find them. They'll have to wait for better days.
However, if you've already stretched your budget to the max on essential items and it's still not enough, your local payday lender should still not be your first stop.
The aforementioned Pew study found that 41% of borrowers end up needing a cash infusion from another source just to pay off their payday loan. For this reason, experts recommend that borrowers just go to these other cash sources first before resorting to a payday loan, including:
These are just some of the available options available to borrowers, and many of these options come with little interest or fees. Even when they do come with interest (i.e. credit union loans and credit card cash advances) their interest rates will always be lower than the astronomical 300%-plus rates charged by payday lenders.
Going with these other financing options before payday loans can save you thousands in interest and fees every year.
Too many borrowers use payday loans to make their credit card payments. If you thought your credit cards had high interest rates, just wait until you try to pay it off with a loan that charges 300% interest or more and fees every two weeks.
Instead of turning to payday loans to pay off other debt, The Center for Responsible Lending recommends:
"The best alternative to payday loans is for consumers to deal directly with their debt. Many creditors will negotiate partial payments if a payment plan is in place. Working out a payment plan with creditors can allow the consumer to adjust billing to pay off bills over a longer period of time."
One payday loan is costly enough in terms of fees and interest. But where these loans really get out of hand is when borrowers turn to them frequently to address their financial problems.
Most of payday loan customers take out these loans because their cash flow falls short again and again, according to the Pew study, not because of costly one-time emergencies. And then these borrowers make the expensive choice to use payday loans again and again and again to address these shortfalls. Ninety-eight percent of payday loans are to repeat borrowers, says the Center for Responsible Lending, and the average payday borrower has nine transactions every year. What does this cost the average payday borrower?
"If a typical payday loan of $325 is flipped eight times, the borrower will owe $468 in interest."
Instead of turning to payday loans regularly to fill the gaps in your budget, it's highly recommended that borrowers seek better long-term solutions. Depending on your household, this might mean trimming down unnecessary expenses, working with your credit card company to reduce your payments every month, switching jobs, or finding other sources of regular income.
Many states are pushing legislation that would force payday lenders to limit how much money they can lend to each borrower. Why? Because too many payday loans are too big for borrowers to pay back in a reasonable amount of time.
Whether or not your state has these laws in place, it's a good idea for you as a borrower to impose your own limits on how much you'll take from a payday lender.
You might be tempted to say, "I'm desperate. I'll take all the money I can get." But if you take a closer look at your finances, you'll likely find that you have a very specific dollar amount that you need to make ends meet. It's recommended that you do this before you go to your payday lender and determine exactly how big (or small) of a loan you need.
The less you borrow, the less you have to pay in interest and fees. And the greater the likelihood that you'll be able to pay the loan off within the loan repayment period and avoid any extra fees.
It starts when payday loan borrowers don't totally understand the terms of the loan they're getting, like when their fee payments will be due or that those payments will be automatically withdrawn from their checking account. Too often, borrowers forget that this is going to happen until the payment is withdrawn. In addition to the fees and interest they're already paying, they get hit with overdraft fees from their bank.
Talk about adding insult to injury.
Getting a payday loan is meant to be easy and convenient, but you can't afford to get sloppy. As high-risk as payday loans are, you must make sure you completely understand what and when you'll be expected to pay before you sign on the dotted line.
Some American households will never need to use payday loans. But others need the relief this product offers but few other industries are willing to provide. However, the overall message with payday loans is that they should be treated as a short-term solution and only when all other options have been exhausted. Those customers who tread carefully will get the benefits that payday loans offer without becoming slaves to the costs.
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