They’re a Terrible Idea, So Don’t Even Consider Them
We all know that we’re supposed to avoid generalizations. After all, you can’t claim, for example, that everyone thinks the same way about something. It just can’t be. There’s got to be at least someone who might think differently.
Well, when it comes to “payday loans,” we can generalize, because all experts agree that they’re a bad idea.
A payday loan is a cash advance from a lender that is usually equal to your next paycheck, which you will be obliged to repay by forking over your entire paycheck after that one, plus interest. Where are you going to get that extra money from to pay the interest? Good question. That’s the first reason why payday loans are universally considered by experts to be a terrible idea.
The second reason why payday loans are universally considered by experts to be a terrible idea is that you’ll have to go an entire cycle without a salary. You’ll have to make the loan stretch twice as long as a single paycheck. If you couldn’t make one paycheck last two weeks (the average length of a payday loan), how on earth can you do that with another? Good luck.
The third reason why payday loans are universally considered by experts to be a terrible idea is the interest and fees you’ll have to pay. According to the Consumer Federation of America, payday loans range from $100 to $1,000, depending on legal maximums imposed by state regulations. The typically annual percentage rate (APR) on interest for that typical two-week loan is 390% to 780%. Add to that a finance charge that amounts to anywhere between $15 and $30 for every $100 borrowed. Want to borrow for a shorter period? That won’t save you any money. In fact, it will cost more because the APR is even higher.
Mind you, the above rates are valid only in states that cap the maximum cost. In states that don’t, the rates will even be more onerous. That brings us to the fourth reason why payday loans are universally considered by experts to be a terrible idea – in order to protect consumers like you, an increasing number of states attempt in one way or another to discourage them. In fact, because they’re such a bad idea, 11 states prohibit them entirely:
Because the threat that payday loans pose for consumers is so acute, there are only six states left that impose no restrictions on them at all. These states are:
The remaining 33 states that have not yet prohibited payday loans impose conditions on them that limit their lender practices in one way or another. Most of these limitations concern the amount of interest and/or fees that lenders may charge borrowers. To prevent consumers from becoming addicted to payday loans, another widespread limitation restricts the number of times a borrower may consecutively “rollover” his or her re-financing. What leads to this was the fifth reason why payday loans are universally considered a terrible idea – the fear of the “rollover” effect, in which each payday loan is paid for by taking out yet another one.
Of course, as is the case with many other types of regulations, loopholes can exist. In some of the 33 states that do regulate payday loans, lenders can take advantage of them to avoid caps on interest and fees. In Illinois, for example, all financing that extends beyond 120 days is exempt from interest caps. So the providers of payday loans in that state will claim to be generous by telling you that they’ll give you 18 weeks to repay rather than the proverbial two. In truth, however, that’s because they’ll make much more money off of you in the process.
For all these reasons, experts universally agree that payday loans are a terrible idea. Listen to what they tell you.