It’s happened to everyone. Your transmission goes out, or you forgot to pay your light bill. Maybe you partied a bit too hard last night and lost your tooth in a bar fight. But you don’t get paid until Friday, so what do you do? You hop on the internet and start searching for a payday loan.
Fast payday loans have become popular, but they’re not without controversy. As of 2017, 18 states have outlawed these loans altogether, and most others have strict restrictions on lenders. Let’s take a look at fast payday loans, and whether they’re a good option for consumers in a bind.
What’s a Fast Payday Loan?
The answer to this is a bit more broad than you may think. Because payday lenders have historically been quite predatory, the definition of payday loan has become a bit gray.
In the past, a payday loan was a small, short term loan offered by a direct lender to a customer. The bank would collect information about the consumer, issue a loan, and the loan balance would be deducted from the customer’s bank account on their next scheduled payday.
The problem with payday loans is that the lenders were charging phenomenally high interest rates. A $500 loan could result in as much as a $600 balance over the course of a two week period. And gods forbid the customer didn’t repay the loan on time – the interest and fees could cause the loan balance to equate to double the initial principal borrowed in just a month’s time. Loans were issued which carried a 500% APR.
But despite their high cost, consumers turned to fast payday loans for a number of reasons. Many didn’t want to ask friends or family for help. Some used the loans for unexpected medical bills or other emergencies. And still others used the cash for electronics or vehicle purchases.
Today, as not every state permits this type of lending, some payday loans take other forms. Salary advances from a customer’s bank are a type of payday loan, as are car title loans. Each state has a specific set of regulations which restrict the interest that a lender may charge, if the state allows the loans at all. Whatever the lender is calling it, payday loans generally still carry higher interest rates than private installment loans, and you may have other options.
The Trouble with Payday Loans
We’ve mentioned the huge amounts of interest charged by lenders. These lenders take advantage of consumers who either don’t have credit or have bad credit. Chances are, they don’t hold a credit card for emergencies. And regardless of their credit score, they obviously have no cash assets – that’s why they’re borrowing.
In 2013, an article was run in the New York Times which exposed how well-known banks work with payday lenders. As payday lending was banned in more and more states, lending companies began to set up shop overseas in locations like Belize and Malta. These loans still existed, but now it was more difficult for lenders to collect.
In order to collect loan balances from consumers, these lenders need the help of American banks. Banks like JPMorgan Chase, Bank of America and Wells Fargo assist in collecting cash from customers by automatically withdrawing the funds from consumers’ bank accounts. Remember, these consumers are already strapped for cash. So as a result of the automatic withdrawal, banks are able to collect overdraft and other fees. This in turn costs the consumers more money, leaving them right back where they started.
In addition to the problem of fees, there is no restriction on what can be collected. As an example, child support payments have certain protections under tax law. They’re also not considered income for lending purposes if the consumer chooses not to disclose them. However, there is nothing to stop a payday lender from withdrawing child support funds as collection on a loan.
Should you Use a Payday Loan?
Payday loans are certainly not without a small bit of merit. They offer a convenient way to make emergency purchases, and if you use them responsibly, they’re really not much different from a credit card. Before requesting a payday loan, you should be absolutely certain that you’ll be able to pay back the loan as agreed. Adding bank fees and additional interest to your loan will not benefit you at all.
But there are other options you can turn to if you’re in a pinch. It may seem obvious, but you could ask friends or family for help. You could even possibly work out an arrangement, complete with promissory note, with your employer. She loans you 600 bucks and you pay her back $150 out of a few paychecks. We understand, though, that not everyone has connections like this; that’s why some people turn to fast payday loans.
If you’re really strapped and you can’t ask anyone for help, your best bet is to talk to a representative at your bank. Some banks offer short term loans or small installment loans for personal use. It’s always better to go in person (even if you’re still missing a tooth) so that you can speak with a loan officer about options. Adding your face to your emergency can improve your chances of getting the loan you need.
If you’ve got a little more time to wait, there are secured credit cards for people with fair to poor credit. Now, some secure credit cards only offer you a credit limit equal to the money you send them. These are beneficial in a way, as they can help to improve your credit score. But what we’re talking about is slightly different.
There are credit cards which exist that require a deposit based on your credit, and offer a higher credit limit. For example, a fair credit score would require a $50 deposit. In turn, you would receive a credit card with a $200 limit. These cards aren’t ideal, as they generally carry about 19-24% interest. They’re also going to take a week or two to be sent to you.
Ultimately, it’s your decision whether you want to use a fast payday loan. But do remember that the best way to have money in case of emergency is to either start a savings plan or improve your credit score. Payday loans are a nice way to get cash in a pinch, but there are much better alternatives for consumers with a solid credit history.