A quick Google search for ‘payday loans’ yields plenty of results promising quick cash, no matter what your credit score is, in minutes. Although payday lending operations, places that give a short-term, high-interest loan as an advance against your next paycheck, are illegal in North Carolina, there are many ways that they skirt the rules and as a result, are readily available to anyone with a computer.
And there’s been legislation proposed to make them legal again in the state (albeit with a cap on the interest rate).
Do payday loans offer quick relief between checks or do they lead to a never-ending road to debt? Google results don’t mention the 500% interest rate when all is said and done, so read on for some warnings about this lending practice.
First, a quick story about a friend of mine who used the service when a check she was counting on was delayed. Her credit was average and her pay steady, but she still counted a full-time job paycheck as well as freelance work to pay the bills. When mid-month came, and an accounting error delayed one of her freelance checks, she didn’t have the cash to pay mid-month bills (isn’t this the very definition of living paycheck to paycheck?). She thought she’d borrow $200 bucks from a payday lending place, knowing she’d pay $50-$60 in fees/interest.
The service electronically debited $50 out of her account on payday, and every payday until the loan was paid off. After the fifth debit, she thought she was through. When they took a sixth debit for $50, she called the service. They told her that she was just paying the interest and she still owed the initial $200. She paid the full amount at once, $250 that day, to rid herself of the loan. Not only did she pay $500 total, she had to do another payday loan (this time paying it all on her next payday) to compensate for all of those interest payments.
Second, a more striking anecdote from the great personal finance blog getrichslowly.org:
Mr. Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to Gallup [New Mexico] and visits 16 storefront money-lending shops. Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”
The bottom line? A quick fix is very often not ‘a’ quick fix at all. Desperate to pay rent or buy food for their families, many consumers are turning to payday loans as their last hope for urgently needed cash.
The Consumer Fraud Task Force offers these additional tips for consumers considering taking out a payday loan:
- See if your bank or credit union offers short term loans.
- Contact your creditors or your loan service company as quickly as possible if you are having trouble with your payments. Ask if you can have more time.
- Use a credit card for emergencies. Although this is generally an expensive way to borrow money, it is less costly than payday lending.
The bottom line is that legitimate lenders loan on the ability of potential borrowers to repay it. Payday lenders count on the fact that customers can’t. They thrive on making loans borrowers can’t pay off. If that’s not a trap, I don’t know what is.