The 1460% Loan

When it comes to personal finance, there is usually a great deal of discussion on the high rates of interest charged by credit card companies. What credit card companies charge, however, does not come close to what the payday loan companies charge (this is in no way to excuse credit card companies for charging outrageous rates, just to point out that where there is bad, there is often worse). Loans from payday establishments can top 1000% (unfortunately, that is not a typo). Take a look at the rate disclosure sheet for which charges a rate as high as 1460%:

When it comes down to it, getting a payday loan is one of the worst type of loans that you can ever receive and you’re better off with practically any other alternative you can find. In fact, many people that use payday loans end up in debt traps. Since the vast majority of people that turn to payday loans are those living paycheck to paycheck who need a bit of money quickly (payday loans range from $100 to $1000). What happens is many are forced to repeat borrowing cycles because of the extremely high cost to borrow the money and the short repayment terms (usually 5 days to 2 weeks). In order to pay off the initial loan they take out, they must take out another, larger loan to pay off the initial loan. Once this begins, there is virtually no way to get out of the spiralling debt trap.

One of the biggest problems is that once a payday loan is taken out, the consequences of failing to pay off the loan and make good on the check used to secure the loan is usually far worse than if the loan wasn’t taken out in the first place. In addition to having the payday loan institution report it to the credit bureaus to ruin your credit and using strong arm tactics to try and get you to pay the loan, you will also get bounced check fees from your bank and may lose the bank account all together. This can result in making it difficult to ever get a bank account again.

If you find yourself short of cash, you want to try every conceivable way to avoid taking out a payday loan.

  • Go to your bank or credit union. More and more are offering short term loans that have rates that are much better than the payday loans, but work essentially the same way.
  • If possible, use your credit card. While you are likely to have double digit interest rates, it’s still better than quadruple interest rates.
  • If using a credit card isn’t possible, get a cash advance from your credit card. Interest rates are usually higher for cash advances and interest starts accruing immediately, but is is still many times better than the rates payday loans charge.
  • If the money is to pay off a bill that is due, call the company and explain the situation. Most will be willing to work out a payment plan with you and the terms will be much better than the payday loan.
  • Wait. While defaulting on a payment you need to make isn’t pleasant, it may be a better alternative than getting into a payday loan trap. Think through the consequences of both before getting a payday loan.
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    5 Responses to The 1460% Loan

    1. Cindy says:

      No questions the interest rates on payday loans is usurious and egregious. Just one more reason to plan ahead and have an emergency fund to cover finanical emergencies and not even need a payday loan in the first place.

      The sad truth is the vast majority don’t and in any transaction the party who’s desparate will get the short end of the stick. And let’s not forget interest rates can be deceiving. If a borrower were to secure fast emergency cash and pay $20 interest in a 5 day loan of $100 sure the interest rate is astronomical, but it’s still $20. And it that $100 helps you pay a utility bill or maybe even two and avoid 2 $30 late fees. Was it worth it?

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    3. Lisa Eisner says:

      I agree the rates are awful. The truth is though a payday loan is often the only option for the very low income.
      I had a FICO score of 730 with no collections and could not get a $300 loan from my credit union. I have been receiving direct deposits at this credit union for over 2 years, have never bounced a check, etc. I appealed the denial to the board of directors and was still denied.
      I opened another account at a different credit union. This time my EQ FICO was 770. I was denied a loan again due to my income. This time I attempted to take a loan out for $1,100 as a collateral loan so I could buy a car. They looked up the car and said it was worth 5K but they would not approve me for the loan because of my income.
      It often has nothing to do with credit or money management. They traditional financial institutions have lending guidelines set up that exclude the very low income.

      It’s not always a question of paying a bill “late”, it’s sometimes about keeping electric turned on or paying the court rent before you and your children are evicted. I wish people would give those getting payday loans the benefit of the doubt that they have exhausted every other possibility. There is so much criticism of payday loans but most banks/credit unions are not willing to lend to the very low income. I had a difficult time even getting each credit union rep to finish my application once I stated my income.

    4. Lewis says:

      The other thing to factor in with credit card APR’s, is they are compounded daily based on average rates, and at the end of the year, your total interest will be greater than the % listed on the paperwork if you carry a balance. Most reputable payday lenders have a flat service fee, which is never compounded or added to. NSF and/or late fees aside (where applicable). Also, most are willing to work with there customer just like any company, offer repayment plans, grace periods, and extensions. The citing of Annual percentage rates to compare a loan of a couple weeks to a month to a daily compounded rate is comparing apples to oranges, or at least a Granny Smith to a Fuji.

    5. Jerry J says:

      Payday loan charges may well be so high as to be out of order, but I was talking to our local Pawn Broker the other day and he does a roaring trade in cheque cashing at 6%, and none of his customers complain at that – they are only to eager to get their hands on the money!

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