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Danger! Payday Loans are a Weapon of Mass Destruction

According to Wikipedia weapon of mass destruction (WMD) is a weapon that can kill and bring significant harm to a large numbers of humans (and other life forms) and/or cause great damage to man-made structures (e.g. buildings), natural structures (e.g. mountains), or the biosphere in general.

WMD’s can harm innocent people and there’s no stopping them. Currently, I’m creating a list of the “Financial Weapons of Mass Destruction”. These are product or services that I feel that offer no real value and are causing great harm to the financial health of many Americans. Topping that unpopular list would be Payday loans. I’ve been fortunate to have never had a direct run in with payday loans. It wasn’t until I had a meeting with someone that was approaching retirement, that I truly learned how evil they can be.

In a nutshell, the lady I had met with was struggling. She was 70 years old and still working. Somehow, despite her simple lifestyle, she was having a hard time trying to make ends meet. Faced with unpaid bills and a late house payment, she turned to the easiest source of quick cash she could think of: payday loans.

So how bad was it?

One of the loans she took out had a 521% interest rate!

Like I said, I’ve never had a direct run in with payday loans, so initially I thought it was a typo.

It wasn’t a typo.

That was her interest rate. An astronomical 521%!

That meeting got me thinking about how many other people fall victim to these outrageous loans. And how in the hell is that legal? According to the Americans for Fairness in Lending here are some convincing stats:

  • Payday loans cost consumers over $4.2 billion in predatory fees each year.
  • The typical payday borrower pays back $793 for a $325 loan.
  • Ninety percent of the payday industry’s revenues come from consumers who get five or more loans in a year.
  • For two-week payday loans, finance charges result in interest rates from 390% to 780% APR. The first APR is for a fee of $15 per $100 borrowed, the second APR results from a fee of $30 per $100 borrowed.
  • The fifteen states (and DC) which have banned payday lending, are saving their residents a total of $1.8 billion per year in predatory payday loan fees.
  • There are more payday stores in the United States than McDonald’s restaurants. At the start of start of 2008, industry analysts claimed that about 23,600 payday storefronts in operation.

Did you catch that last stat?

More payday stores than McDonald’s.

Payday Loans

Don’t Be Tempted

Payday loans can be tempting in times of financial stress. After all, they offer quick access to money, and if you’re faced with expenses or bills you can’t figure out how to pay, the idea of quick cash to solve all of your problems temporarily is hard to pass up. Just like the lady I met with. Many people unable to access other sources of credit, like credit cards, personal loans or even overdraft privileges with their bank – often resort to getting a payday loan. Other sources of credit can also take quite a bit longer to obtain where as a payday loan is often within 24 hours, making it even more tempting to someone in need of fast money.

If this is you and your contemplating getting a loan…..STOP! There are other options. If you’re still not convinced, here are more good reasons to avoid payday loans.

Payday Loans Have Expensive Consequences

A payday loan may solve your immediate need for money, but it’s not free. In fact, there are some very expensive consequences to borrowing money with a payday loan. Often, a flat fee of 20% of the amount borrowed is added to the loan, and even if you’re able to repay the loan in just a few days, you have to pay this amount. If you borrow a payday loan of $1,500 you’ll pay a flat fee of $300 even before any interest or late fees accrue.

Because payday loans are meant to provide money in between pay periods, if you are unable to pay the loan back with your next paycheck, you’ll also pay interest and late fees on top of the flat fee. The interest and late fees accumulate quickly, for as long as you are unable to pay the amount back in full.

Payday Loans Commonly Result in Repeat Borrowing

Avoid Payday Loans

For many people looking to borrow from a payday loan, a viscous cycle of payday loan borrowing begins. When the first loan becomes due, it’s not unusual for someone to take out a new payday loan to pay off the first one, hoping to avoid ongoing interest and late fees. These people hope that by the next pay period they’ll be able to pay off the second loan, but the cycle is very hard to escape since the flat fee and monthly interest or late fees accumulate so quickly on payday loans.

Some payday lenders will only allow you to borrow a certain amount of money in a year; or will begin reducing the amount of money you’re allowed to borrow each time, even if you’re using the new payday loans to pay off older payday loans. In many states, payday loans are illegal because of their excessive fees and because they take advantage of individuals who are in bad financial situations.

Payday Loans Don’t Solve Financial Difficulties

The main reason an individual would turn to a payday loan is because they are experiencing financial struggles that seem impossible to fix with their own income or through their access to other money sources. While a payday loan may appear to fix the most immediate need for cash, it’s a short term solution at best, and will almost always result in long-term financial problems that are even worse than what you started with.

In regards to the lady I met with, was it all the payday loan store’s fault? Of course not. She knew exactly what she was doing and how much the interest rate was. Where she went wrong was that she wasn’t managing our finances well. Period. Don’t fall in her same trap. Take charge and figure out a Plan B.

Jeff Rose is a certified financial planner and U.S. combat veteran. He blogs at Good Financial Cents and Soldier of Finance.

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