03 February 2009

Just Say No to Payday Loans

There is a monster lurking out in the credit world. You may think that I am talking about the big credit card companies, but sadly, no. Since I am in a dinosaur mood, I'm going to see if I can completely mess-up this analogy: The big credit card companies are represented by the T-Rex and the part of the Velociraptor is played by the Payday loan. They hunt in packs (you see them on almost every street corner), they are relentless in their attack (the lure of easy money, fast), and they totally devour their prey (high interest rates).

I realize that there may come a time when there is no choice but to get a loan from one of these places, but please be aware that you may be opening a door to a certain lady's box. For example, let's say that you need to borrow $200. You go down to your local Loan store and get your money, what could be easier? Well, depending on the company you choose, you will be paying anywhere from $41.00 to $50.00 for the privilege of borrowing that money for 14 days. Now, on first glance that may not seem like a great deal of money, but just take a minute and have a look at the interest rate you are paying: anywhere from 430.18% to 573.57% APR (roughly 21-25% for the 14-day loan).1I don't know about you, but I find that a trifle high. With those type of rates, I am half expecting someone to drop by and break my legs if my payment is late.

I took a look at three of these companies and the only one that offered the lower rate, $41.00, was MoneyTree. All the others used a rate of 25% for the 14 day loan period. At the end of the term, you pay the company $250 and you are done. But, let's say that you just can't pay them at the end of the 14 days, what can you do? Well, you pay them $50 (your interest) and they will extend the term of your loan for an additional 14 days. At the end of that period, you pay them $250. So, for the $200 you borrowed, you have paid $100, or 50% of the original loan. If you are already on a tight budget, how will you be able to come up with the extra $50-$100? Does this seem worth it to you? Can you see where this can become a vicious cycle?

This cycle has become so dangerous, that the Federal government has even joined the party. "On October 1, 2007, a new federal law became effective that severely limits the terms under which we can loan to active duty members of the military and their spouses and dependents. As a result, after this date we will no longer be able to offer payday loans to our military customers."2 Now, if they get involved, you know that there is something to be concerned about.

I realize that in this age of tight budgets and little disposable income, there is a real temptation to get cash, fast; It's easy and convenient, but at a price. I know from experience (I fell into this money pit about 7 years ago) the type of trouble you can get into by using these services, so PLEASE think it through and be very careful.


1moneytreeinc.com (dead link removed)

2moneytreeinc.com (dead link removed)

17 comments:

  1. With a high interest rate like this, I don't see the reason why one wants to put oneself into additional stress. The 'snowball' will just roll bigger and bigger until it completely roll over you.

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  2. BK: Speaking from experience, it can be very difficult to escape from this cycle. It took us several months to get back on track after using these loans.

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  3. Even in desperation, I have never used one of these companies. I think they should be outlawed.

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  4. redkathy: Good for you. I just hope others will follow your example, because the way things are going, these companies are going to thrive on the misery of others.

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  5. I also think they should be outlawed.
    Seems like if you are that desperate there is someplace that can help you out. Your church, government, parent, child, sell something on Craigslist. This is like a Christian loaning their soul to the Devil, not a good idea and make sure you read the fine print.

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  6. You did a great job presenting this data. I know several families who depend on these places consistently and I can only imagine how much they are paying in fees!

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  7. One of Mom's co-workers got one of those loans. Ack!

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  8. I think regulations against them have pretty much put these out of business here in Oregon but I may be wrong. I hate debt and refuse to pay interest on anything other than a mortgage so I can't imagine ever thinking a payday loan is a good idea.

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  9. kreations: You would think that they would try those avenues, but I think maybe pride gets in the way; they want to solve the problem themselves, so they take the plunge and get the loan. I would just like people to actually realize how much they are going to pay for the convenience of one of these loans.

    Rhonda: Thank you. I can't imagine how those families are going to get out from under these loans. It took us several months to recover after we used them and we only did it twice. I wish them all the best.

    Lux: I hope she was able to rebound from it.

    BeadedTail: You moved them over the border to here in Idaho:) I agree totally, I hate debt as well and it is no fun trying to climb out of it. This type of loan is never a good idea, but it's the thought of fast money and no credit check that draws them in.

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  10. You are so right to let people know about these places. I haven't seen even one in Vermont but in Tennessee, they were on every corner. Once you get into a loan from one of these places, they just don't let you go with interest and fees. It's very difficult to live right now but avoid these places. Thanks for presenting a very important issue on your blog.

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  11. Mountain Woman: I figured that since we had such a bad experience with them several years ago, hopefully it could act as a warning to others. It is so true about the interest and fees, they are relentless and it is very difficult to recover from one of these loans.

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  12. hey thanks for a very valuable post! I myself spend much time in debt forums and have heard the horror stories of these places they should be illegal. I would absolutely stay clear! Thanks for the good post!

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  13. shonna: You are very welcome. I can imagine what some of those people are going through. These places will get you into their grips and you have to fight like crazy to escape; It's like getting caught in a Funnel plant.

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  14. The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen.

    Payday lending critics claim that the industry "costs" American families $4.2 billion in fees. But in 2005, consumers spent $4.2 billion in ATM service charges to withdraw their own money. They paid an estimated $22 billion in NSF fees to banks and credit unions, and banks collected an estimated $10.3 billion in late bill payment fees (more than 140 percent of the total estimated payday lending volume in the U.S.) And credit card interest cost consumers more than $87 billion.

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  15. JeffKursman: Thank you very much for the information you shared. With regards to the ATM fees, I can withdraw $200, but only pay $2.50 in fees, which is a great deal less than $50. Again, credit card interest can be around 25%APR, which is a far cry better than 25% for 14 days. The other points you brought up, I agree with. It also seems that since we were nice enough to give these banks our hard-earned tax dollars, they have rewarded us by raising the interest rate on our credit cards, expanding the fees used to service those cards, and restricted their lending practices. I am no fan of the credit card companies, but I am also not a fan of the Lending Services.
    Again, thank you for taking the time and sharing your information.

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  16. myonlinepaydayloans: Thank you. You are very right, when the original loan is extended, that is when the borrower really needs to be careful. Shopping around and being educated when you borrow money is something every consumer should do, unfortunately, most do not do this. Thank you for your comments.

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  17. myonlinepaydayloans09 May, 2009 15:05

    I liked your comments about the cycle of lending and how it may not be so bad at first, but if a person keeps extending their credit then they are more likely to get in deeper than they originally were. It makes sense to shop around and find the best rates and fees so that it becomes more sensible to payback.

    (Dead link removed. Comment originally made on...February 27, 2009 5:25 PM)

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