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Do All “Pay Day Lenders” = Debt Traps?

I watched a Facebook post today from a Senator schooling one of President Trumps administrators in “Payday Lenders” and “APR”. The administrator could not correctly articulate what APR was. For the rest of us it stands for Annual Percentage Rate.

The APR is a mathematical calculation including the finance charge, the amount financed and the payment schedule, highlighting what you would repay if you took the loan over one year.

The senator set the following quiz question to President Trump’s aide:-

“A single mom has her car break down at the side of the road. She lives in California. She has to get her car back on the road ASAP so she takes a $200 Payday loan with a finance charge of $10 per $100 borrowed. She takes this loan for two weeks until she receives her next pay cheque. What is the APR?”

Needless to say President Trump’s Aide did not answer the question but rather tried to deflect over and over again to take the debate off topic.

So – again, for the rest of us:-

$200 at ($10 per $100) 10% Origination fee for two weeks = 520% APR.

And you thought Credit cards were bad at 19.97%!

On average the APR for a typical Payday loan comes in at 400% with many people rolling the loan week after week until it becomes impossible to repay, thereby trapping people in debt.

Rules for Payday Lenders.

Legislation was passed to try to stop unscrupulous lenders from trapping people in a vicious cycle of debt. (Magnify Money) but this doesn’t stop the extortionate rates. Most people fail to read the small print of the contract and do not realize what they are signing up for. The legislation calls for clearer policies and lending practices; with Lenders taking responsibility for ensuring a stress test for repayment is met.

I don’t believe this happens.

What are some of the alternatives to a Payday loan?

Let’s face it, if this wasn’t an emergency you wouldn’t be doing it, right? What else could you try first?

Pick up the phone and speak with your creditors. See if you can negotiate a payment holiday on any other bills to enable you to use your available funds to deal with this emergency.

If you can, use your credit card or dip into your emergency fund. It’s OK to do that in this case. You do have a small emergency fund, right? No?

Sell something. We all have useless crap lying around the house and the saying goes “one mans trash is another mans treasure”.

Ask the bank for a small or temporary overdraft.

Borrow from friends or family. Pay them back as a priority!

Misconceptions surrounding Payday loans.

You will not go to jail if you do not pay a “payday” loan but a creditor may pursue collection of the debt through the civil courts; however, debtors cannot be prosecuted in criminal court for not paying a debt.

A payday lender can only garnish your wages if it has a court order resulting from a lawsuit against you. If you don’t repay your loan, the payday lender or a debt collector generally can sue you to collect.

How to get out of payday loan debt

Look at all your debts together.
Prioritize high-interest debts.
Ask for an extended payment plan.
Refinance with a personal loan.
Get a credit union payday alternative loan.
Look into payday loan debt assistance.
Borrow from your support network.
Turn to your job for debt help.

It is very costly to be stuck in a payday loan cycle for a long time and can lead to larger financial problems. Payday loans are also much more expensive than other methods of borrowing money.

In general the APR for a credit card can range from about 9% to 30% with the average being around 20%. Personal loans generally have lower APRs than credit cards

A payday loan will always impact your credit record in some way. Some can even help to boost your credit score by helping you avoid penalties and missed payments that fall due before your salary comes in.

5 main benefits of payday loans in a difficult financial situation

A payday loan can be one of the best ways of raising cash quickly to solve a financial emergency. A payday loan is payable with the next paycheck, which usually means a maximum of two weeks to be in debt. Payday loans have various advantages over other types of credits.

1. Speed

Most lenders approve applications for payday loans almost instantly when you provide the necessary information. The application process is simple and quick.

2. Convenience

All the processes and interactions involved when applying for a payday loan are conducted online. You do not need to book an appointment with a loan officer or call your lender severally to get cash. You can send your application from your home or office.

3. Few Requirements

Accessing a payday loan is easy because you only need to meet a few basic requirements. The most important requirement is a stable source of income.

4. You can Qualify for a Higher Amount

Many payday lenders limit the loan amount that new borrowers can access. You can only access an amount that is within your salary range and the lender’s range. When you pay for your first payday loan on time, your lender can increase the amount that can access in your subsequent applications.

5. Protecting your Credit Rating

The short repayment period for a payday loan may seem like a shortcoming but it is an advantage if you want to protect your credit rating. If you apply for an instalment loan, you will have one or two years to repay the loan. Anything can happen within that time.

Last Resort.

For me, taking a Payday Loan is something I have never done but Hubster once worked for MoneyMart in England so we have a little inside information. I’m not saying we never would but, as a family, we’ve been to Hell and back (financially) and still never resorted to this. It takes effort not to take the easiest option but sometimes that extra effort is what saves you.

Anna