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.

Credit Card Surcharges now Legal, but are they Practical?

This week, a lawsuit was settled that now allows retailers to pass through the credit card fees they pay to you the consumer – with some exceptions and some confusion.  Ten states hold out on the new law change that allows retails to pass on the credit card surcharges for using a Visa or MasterCard.  If you live in one of these states, you could be saving up to 4% on your purchases.

Texas, California, Colorado, Connecticut, Florida, Maine, Kansas, Oklahoma, Massachusetts, and New York are the ten states that still make passing through the credit card fees to the consumer illegal.  But if you don’t live in one of these states, you still may benefit from the laws in these 10 states without shopping there.  Retailers are required to treat all of their stores the same in how they handle credit card fees.  So, if a retailer has a store in one of these 10 states that does not allow them to pass the fee on to you, then they cannot pass the fee on to you in any state.

One news station reported that some retailers, including Walmart and Target and others, had ‘decided’ not to pass along the fees.  In reality, large retailes will not be able to pass along the fees since they have stores in at least one of these states.  Another limitation for retailers is that they must treat all credit cards the same.  If they accept American Express, they cannot pass the charges on for any of the credit cards they accept.  Be aware that many small businesses do not accept American Express or may discontinue accepting American Express

How to avoid credit card surcharges:

* Shop in one of the 10 states that don’t allow the credit card surcharges

* Use a debit card:  Credit card surcharges can not be applied to debit cards even though they have a Visa or Master Card logo.

* Shop at a store that does not pass the surcharge on to you the customer.

How to know if your retailer is charging you credit card fees:

Retailers who choose to pass along the credit card fees are required to inform you by at least one of three ways.  They can display a sign at the entrance notifying you, place a sign or notification at the point of sale or cash register check out where you use the credit card, or print the information on the receipt.

Printing the information on the receipt is really notification after the fact and you will need to read your receipts.  The retailer is required to show the amount of the surcharge being passed on to you as a separate amount on the receipt and the amount can only up to the actual fee they pay up to 4%.  They cannot assume the full 4% if their rate is lower.

Cautions:

Fees can vary by type of credit card:  Cards that offer Rewards programs or have a Premier status may charge higher fees and so the higher fee can be passed on to you.  You will need to find out if the fees for your different credit cards vary and choose the best option for you.

Online retailers can charge the fees as well, unless some of the other limitations apply.  This can take away the advantage that online retailers can have with regard to sales tax in some states.

Small Business: Boost or Bust? Small businesses  may not have locations in other states and so may have the legal availability to pass along these fees to the customer.  Small businesses often pay higher fees than large retailers so they may see this as a way to recover costs without raising prices in a slow economy.  However, they will be caught between wanting to recover costs and still competing with the prices of larger retailers.   Once again, small business could be hurt by a law that was intended to help retailers.

Keeping track of who charges and who doesn’t?   While many or even most retailers may not pass on the fees to you, over time, more and more retailers may start to charge the fees.  You may need to begin to keep track and be able to continually evaluate if a lower price at one retailer will in fact be a higher price to you.   Watch for those signs, and always look at your receipts.

Reality Check:

This change in the law is confusing and awkward.  The software of retail stores will all have to be modified to charge and track the fees for reporting.   Store credit cards like Lowes or JcPenney or other retailers may not be able to pass through the charges if they cannot also pass through the charges on their store brand credit cards.   American Express cards may become more popular for consumers, but less popular for retailers.  Debit cards, especially reward debit cards may become more popular to give the best of both world’s in providing a reward as well as protecting from the additional fees.

Even though we may not see this surcharge take affect immediately, this change does make way for the charges to begin showing up and becoming normal.  This might feel a little bit like the frog being placed in the pot and the water just beginning to warm up to charging you and extra 4%.  Don’t let this sneak up on you.

Keep an eye out for additional charges and look out for each other.

Let us know if you see any of these charges on your receipts, or signs at retailers passing on these fees.