To Payday or Not to Payday? (1 of 3) – Skipping the Drama of Payday Loans

To Payday or Not to Payday(1)

Who doesn’t love good dramatic theater? The music, conflict, romance and comedy that happens once those stage curtains go up is enough get to anyone excited. But there’s one type of drama everyone should skip: Payday Loans.

Everyone needs money (and help) from time to time. But when you find yourself in need, ask yourself: Is a payday loan what you need, or is it what you really need to avoid?

Here are the top three reasons you should dodge the drama of a payday loan:

1. They’re a trap

Payday loans are predatory loans. This means that the lenders are 100% out to get repeat business out of you. That’s how they make profits! It’s all a ruse, really. A well-crafted ruse perhaps, but a ruse all the same (read more in our Blog How to Avoid a Payday Loan: Savings Strategies).

Here’s how they work: let’s say you take out a payday loan to cover a monthly expense (a Pew Charitable Trusts study found that 69% of payday loan users took out their first loan to pay for a recurring expense, while only 16% used the money for an unexpected emergency expense).1 So you take out a payday loan to cover, say, your electricity bill.

You use the loan to pay the bill, everything is going great. Then your payday comes up and the payday lender pulls the money you borrowed (plus their cut) from your checking account. After the high interest rates and fees, the money you’re left with isn’t even close to enough to afford rent. So what do you do? Well, you go back to the lender and take out another loan. Repeat this pattern 10 times in a year and you’ve got the average scenario for a payday loan borrower.

2. These lenders lie

When faced with criticism from the public, the media, or legislators, the payday lenders all read their lines from the same script: “We provide a short-term solution for people facing unexpected emergency expenses!” (Seriously, you can look up any interview. They all say this, practically verbatim.) If payday lenders and their advertising told the truth, we would be getting a much different story.

These loans are used by people to cover ordinary expenses. They are not short-term solutions, due to high interest rates and rollover allowances. The average borrower is in debt with payday loans five months out of the year, not 14 days like they want you to believe. We’re still looking for a time when it might be a good idea to take out a payday loan. We haven’t found it yet.

3. Everyone knows they’re bad (even the regulators)

Payday lending is facing tough new regulation and for good reason. Small-dollar loans that carry impossibly high interest are currently banned in eighteen states and the District of Columbia. New regulatory agencies like the Consumer Financial Protection Bureau are fighting to curtail this $46 billion dollar industry that is known to target low-income areas.

While the industry and the regulators battle it out, payday lenders are using deceptive advertising and difficult, complex contracts to hide the truth that they are, as one expert put it, “toxic… the leading cause of bankruptcy behind medical and credit card debt.”2

So, if the question is “To payday or not to payday?”, the answer is pretty clear: Never.

If you do need financial help, don’t payday. Consider a safe, credit-building installment loan. OppLoans helps people escape payday loans every day. Our personal installment loans come with longer terms and lower interest. You deserve better than a payday loan.

References:

1. “Payday Lending in America: Who Borrows, Where They Borrow, and Why” Federal Student Aid: An Office of the U.S. Department of Education. Accessed May 13, 2016. href=”https://www.pewtrusts.org/en/projects/small-dollar-loans-research-project
2. “Payday Loan Rules Proposed by Consumer Protection Agency.” NewYorkTimes.com. Accessed May 13, 2016. href=”https://www.nytimes.com/2015/03/27/business/dealbook/consumer-protection-agency-proposes-rules-on-payday-loans.html?_r=0

Blog Series: To Payday or Not to Payday
Part 1: Skipping the Drama of Payday Loans
Part 2: Predatory Lending’s Second Act
Part 3: The Final Act