1300 Reasons or More to Never get a Pay Day Loan

Pay Day loans are advertised constantly on television, radio, and every where else.  There are places to get cash loans all around us.  Cash loans seem very easy to get — and they are.  They are easy to get because it is a very lucrative business and the interest and penalties you will pay on this relatively small loan are out of control.

The U.S. Government passed laws that limit the interest rate that these companies can charge to active duty military personnel and their families.  But even the rates for military people are way too high.  If you are not active duty military, the interest and penalties are beyond any rate any legitimate business could charge you.

What is a Pay Day Loan?

Pay Day Loans or Pay Day Advance are simply short term loans considered a ‘cash advance’.  The qualification for this type of loan is recent previous employment and paycheck history.

Pay Day loans were designed for people to get their paycheck a day or two early because their rent or car payment or other bill was due.  The design of these loans were to be made for only a few days – the length of your pay period.  So if you get paid weekly, the loan would be due in 1 week.  If you get paid every two weeks or monthly, then the loan may have weekly payments but was intended to be paid off when you receive your paycheck.

How Pay Day Loans Work?

Since a pay day loan is only suppose to be a short term loan, the full amount is expected to be paid when you receive your paycheck along with any interest charged for the days you had the funds in advance.  For example:  If you expect to get paid on Friday, but you take out a payday loan on Tuesday, you will have the amount of the loan, interest, and financing fees to pay on Friday.

If you borrow the full amount of your paycheck, then you will not have enough money on Friday to pay your loan plus interest plus financing fees and will likely have to refinance the loan for another pay period making you in debt for more interest and refinancing fees on top of the original loan amount.

This may sound like any other loan but it is not.  The finance fees or the charge just for initiating the loan are high and the interest rates are completely unreasonable and we have seen them go as high as more than 1300%.    When you see an interest rate on the loan paper, the percentage is typically an annual interest rate.  Don’t be fooled thinking that since you will only have the funds for 1 week, that a high interest rate is acceptable.  Do the math and you will be shocked.

A pay day loan of $425 at 1300% interest will cost you $425 + $30 finance fee + $170 interest = $625.

That’s not a typo.  This is really 1300% and not 13%.  So a $100 loan at 1300% interest for 1 year would cost you $1300 + $100 loan amount or $1400.  Does that sound reasonable?  It is not only unreasonable, it use to be consider usary (unreasonable and excessive interest rates).    There use to be laws in place that did not allow businesses to charge more than a maximum amount of interest because it was considered to be extreme or abusive.  The interest rate that was considered usary before the law changes was 45%.  That’s 1265% lower than our example.  The example is not only real, it is not rare.  Rates of over 500% up to 1400% are being levied on unsuspecting people.  While the U.S. Government limits the interest rate that can be charged to active duty military, they do not limit the interest rate charged to non military people.  States have governed the maximum interest rates in the past, but with recent federal law changes to credit cards, you may have little or no protection for usary interest rates and you need to pay attention.

Reasons Not to Get a Pay Day Loan

1300 interest points is Unreasonable Interest

The mistake of a pay day loan will destroy your credit.  Bad credit can be corrected over time, but a pay day loan will keep  you in debt beyond your means and make your bad credit horrible credit.

Pay Day Loans are the worst kind of debt you can have.

What do you do then, if you think you need a Pay Day Loan?

The majority of payday loans are taken to pay food, housing and auto expenses or normal living expenses.  There are non-profit organizations and public services in place to help with these types of expenses.  In some cities, you can dial 211 to get information on services that may be available in your area.

Food: If you need the loan for food for you and your children, find other options such as a food pantry, family, neighbors, local churches or other public assistance.

Car Payments and car repairs: It is generally cheaper to pay the penalty for a late car payment than to take out a pay day loan.  Credit card rates and even some pawn shops have interest rates that are far lower than pay day loans.

House Payments and Rent:  Again, it is generally cheaper to pay the late fee and interest for your house payment or rent than to take out a pay day loan.

One thing worse than being evicted from your home or having a car repossessed is being evicted or having your car repossessed and still owing hundreds or thousands of dollars on the pay day loan you thought would save you.  A pay day loan will not save you, it will only make the sitauation much much worse.

If you have a pay day loan now, find every way you can to get it paid off and never go back for another one.  There is no redeeming value to a pay day loan.

If pay day loans are this bad, then title loans on your car are even worse.  Look for our next post on Title Loans.

What is a reasonable interest rate?

AmericaSaves.org suggests that the maximum interest rate you should use for any type of loan is 13%.  Again, that is not a typo – thirteen percent.  Many credit cards are above that rate of interest but not all.

Credit card rates can vary widely based on your credit history and can be as low as 3% to 39% or higher.  For good credit ratings, the interest rate is generally below 10%.  With bad credit, you may still get a card for 25% or lower.  This is not a recommendation for debt of any kind, but rather a caution to know that there is very little protection for you from high interest debt.

Emergency savings and credit cards with no annual fees are your best options to protect you from getting into a high interest debt for even a short period of time.  The value of paying cash and not having any debt is not just the value of interest you don’t pay, but the freedom you have to make better choices.  Protect yourself from debt traps.