The horror of payday loans
A family member and I had the following conversation late last year:
Family Member: Can I ask you a financial question?
Me: Of course you can!
Family Member: I have a payday loan out for $200 dollars, but I need more money. Do you think it’s a good idea to pay off my current payday loan and then get a bigger one in place of it?
Me: Hmmm that depends. How much is the interest on that loan?
Family Member: Um, I’m not sure….49.9%.
Me: FIFTY PERCENT INTEREST??!?!? Have you made any payments to the current $200 dollar loan you have now?
Family Member: Yes, I’ve made three $50 payments.
Me: So you’ve paid $150 total towards your $200 payday loan? How much do you still owe on it?
Family Member: I still owe $200.
Me: *long sigh*
A payday loan is a loan that you can receive from companies like Money Tree, Ace Cash Express, etc. The loan is given this name based off of you not having money until “payday”. These loans tend to be very high interest and usually result in a long payment period, meaning you are paying more in interest than the actual loan amount. These companies are the same companies that will cash your check for a hefty fee.
By the end of that conversation I was finally able to convince my family member that payday loans are no good! In my opinion a payday loan is a quick fix in the moment, but causes more financial issues in the future. I highly suggest never resorting to those loans as they have a track record for burying people in more debt.
Instead you should try to plan your finances better by creating a budget. A budget can help you organize your money and make you aware of how much you are spending. Something that can also help you, in a pinch, is securing a credit card for emergencies. A credit card will help you establish some credit (if you’re using it wisely) and will definitely NOT have an interest rate of 50% (unless you default on your credit card, but that’s another story for a future blog)!
In conclusion, just say no to payday loans.
-Brogan, CU Money Sense team member