Archive for Snake Oil and Just Plain Bad Ideas
Are Payday Loans a Bad Idea? (Part II)
Posted by: | CommentsIn the last post, I talked about the high finance charges that payday lenders impose on credit-challenged consumers. Essentially, for every $1,000 you borrow from a cash advance lender, you’ll have to cough up $1,250 a couple of weeks later.
What could you have done with that extra $250? You could have paid down a credit card, made a car payment or paid a utility bill or two. Or you could have treated yourself to a nice dinner out, and banked the rest for a future cash emergency.
That’s assuming you even have the $1,250 two weeks from now.
After all, when you take out a payday loan, you’re really taking a gamble on:
a) having the money to pay the loan amount plus the finance charges, and
b) not having extra expenses crop up in the next two weeks.
After all, life can be pretty unpredictable. That’s why you needed the cash advance in the first place, right? Can you realistically tell yourself that you won’t hit another financial bump in the road before your loan becomes due?
Now, if ridiculous finance charges aren’t enough, it gets worse.
Payday Loan Cash Advance Extension
What happens when it comes time to pay back the loan, and you don’t have the money in the bank to cover it?
Most payday lenders will graciously allow you to extend the loan for another two weeks – that is, they’ll give you extra time to pay it back. They’re big-hearted folks, after all, and they certainly don’t want to see you stress out about repaying a loan.
(What was that smell?)
Uh, right. They’ll charge you another 25% or so for the privilege of extending your loan. So now, instead of paying $1,250 for borrowing $1,000, you’ll pay $1,500. But hey, you bought yourself another two weeks, right?
Let’s say that two weeks later (four weeks after you took out the loan), things aren’t going any better. Then what? Yep, another extension, another $250.
Bad credit cash advance lenders will typically allow three extensions. So if you exhaust all of your extensions, you’ll end up owing double the amount of the original loan. Sticking with our example, you now owe $2,000 for having borrowed $1,000 two weeks ago.
Handle Payday Loans Cautiously
It would be rather thoughtless of me to tell you not to take out a cash advance under any circumstance. There are, of course, times when there are no other option.
I’d avoid it if at all possible. Call your utility company, credit card lender or whomever and explain your situation, plan your grocery list more carefully or ask a family member for help (I realize that last one comes with its own complications, but most family members won’t charge you 25% interest). Just thoroughly evaluate all other options first.
If there are no other options, plan out how you’ll get the money to pay the loan without taking an extension. You may need to use those two weeks to sell some stuff on eBay, do some moonlighting or hold the mother of all garage sales. Whatever it is, figure it out before you sign the loan paperwork. You’ll save yourself a ton of stress a couple of weeks from now.
-Mike
Are Payday Loans a Bad Idea? (Part I)
Posted by: | CommentsSo you’ve just received this month’s electric bill, and it’s high enough to pay for some middle exec’s Hawaiian vacation. Or the stove finally gave out, and you’re limited to cooking for your family on a tabletop electric grill. Or the transmission in the car you just bought – the one cousin Ed promised would run another 100,000 miles – fell apart in the driveway. Whatever the reason, you have a financial emergency, and you need extra cash NOW.
I’ve been there. There are few worse feelings than laying awake at night, wondering how you’re going to come up with the money to pay for an unexpected expense. Holy crap! What am I going to do?
Suddenly, you have the answer.
Yep, payday loans are everywhere. And now, you don’t even have to deal with the hassle of driving across town to apply for a cash advance. That’s because there are hundreds (maybe thousands) of payday lenders online that will lend you money, sometimes without ever talking to you in person.
But my credit sucks. I’d never be eligible for a payday loan anyway.
Wrong. Good or bad, there are plenty of cash advance lenders who approve people with bankruptcies, repossessions, charge-offs and all other manner of credit issues.
But don’t celebrate just yet.
Here’s the thing: These lenders know that a certain percentage of borrowers won’t ever pay their loans back. That’s just the nature of lending money to people who have already had problems. (That’s not a blanket statement about “people with bad credit” – it’s just reality. Most credit challenged consumers are victims of circumstance, but there will always be some that abuse the system.)
So how do they make money if a percentage of borrowers are essentially stealing money?
They charge ridiculous interest rates.
It’s not uncommon for a bad credit cash advance loan to carry an interest rate of 25%. That’s not an annual percentage rate (APR) – that’s the interest for the life of the loan, which is usually two weeks or less. That means that in order to borrow cash for a week or two, you’re going to have to pay back the loan PLUS a quarter of the loan amount.
To put it into perspective, let’s look at an example:
Let’s say you need to borrow $1,000 until your employer hands you your paycheck next week. Assuming a 25% interest rate, the payday lender will deposit $1,000 into your checking account. When you get paid, the lender will withdraw the $1,000… PLUS a $250 interest charge!
Not quite a century ago, people who charged fees like that wore dark suits, broke people’s kneecaps and fitted late-paying clients with concrete shoes. Today, those kinds of charges are “business as usual.”
$250 is a helluva lot to pay for the privilege of borrowing $1,000 for a couple of weeks. If you don’t have $1,000 now, are you really going to have $1,250 to spare 14 days from now? If you’re like most of us, the answer is usually “no.”
Unfortunately, the high interest charges aren’t even the worst news. Next time, we’ll look at how things can get even worse.
-Mike