Here is the scenario: you are in a financial bind and need some quick cash. You saw payday loan stores all over town and think “maybe I should try that…”
Do not fall into that trap! Getting a loan with a payday lender could send you down a deep hole that may take years to get out of.
Here is how payday lenders catch and hold consumers:
To receive cash, you write a check to them for the amount plus the finance charge – which the lender will cash the next time you get a paycheck. They will tell you finance charges range from $15 to $50 per $100, but they will not tell you exactly what the interest rate (or APR) is charged. Interest rates can run from 390 to 780%, and if your state does not cap the maximum cost then the rates can be even higher.
Here is the math to figure out what you end up paying by borrowing $400 from a payday lending store with a $50 finance charge and a 14-day term:
- Divide the finance charge by the amount you are borrowing: $50/$400 = .125
- Multiply the answer by the number of days in a year: .125 x 365 = 45.625
- Divide the answer by the number of days in the term: 45.625/ 14 = 3.2589
- Move the decimal point to the right two places. This is your APR: 325.89%
At the end of your 14-day term, you have to pay them $450. But if you cannot pay it off entirely then you will have to roll the balance over and pay another $50 fee, as well as interest charges. At the end of your second term, your balance is almost $600 and if you cannot pay that off entirely then you roll it over again. See how quickly your $400 loan can cost you thousands of dollars?
So what are some alternatives?
- Ask your employer for an advance on your next paycheck.
- Consider asking family members or friends for a short-term loan.
- If you were a military service member, then you may be eligible for short-term lending or emergency relief assistance. Contact Military OneSource at 800-342-9647, or visit www.militaryonesource.mil for information.
- A personal loan through DoverPhila Federal Credit Union. We offer loans with low rates and flexible terms.
- Open a low-cost, low-interest credit card through DoverPhila and use it only for emergencies.
No one wants to find themselves in a financial emergency, but there are much better options than turning to a payday lender. To find out more about payday lending and learn about safer ways to get quick cash, visit the Consumer Federation of America webpage www.paydayloaninfo.org/consumer-help.
If you want help getting control of your finances then visit DoverPhila Federal Credit Union. We are committed to helping our members gain financial well-being and offer one-on-one financial counseling as well as additional resources to help you take control of your finances. Contact Fred Weingarth at 330-364-8874 for more information.