The Truth about Payday Loans An interview with financial expert Ann Logue
Anne Logue is a lecturer in finance at the University of Illinois at Chicago and a writer specializing in business and finance. She is the author of four books on investing in the “For Dummies” series and has written for Barron’s, Entrepreneur, and Newsweek Japan, among other publications. She lives in Chicago and holds the Chartered Financial Analyst designation. So she knows finance, what works, what doesn’t, and what kind of financial products you should avoid at all costs.
Payday loans have an awful reputation. Why is that? Is that reputation deserved?
Payday loans have an awful reputation for two reasons. The first is that the interest rates can be really high, and the second is that people don’t always pay them off – meaning that they roll the loan over into a new one with the same high rate of interest. What is supposed to be a short-term fix becomes a long-term problem.
What would lead someone to consider a payday loan?
People get desperate. They need money right away, for whatever reason. It may be a good one, it may be a bad one. Sometimes, people really don’t know that they have other options.
The payday lenders advertise heavily. They are big and visible. And, of course, some people have such bad credit that they believe they can’t go to another type of lender.
What can someone expect if they do take out a payday loan?
Well, it depends. In 2013, the Consumer Financial Protection Bureau released a study on payday loans. They found that the average payday loan was worth $392 and was paid off in 18.3 days. The fee on that average loan was $14.40 per $100 borrowed, or $56.45. Some borrowers take out their loan, use it to solve their problem, pay it off, and get on with their lives.
The problem is that most payday borrowers take out far more than one or two loans a year. In fact, 87% of borrowers took out three or more payday loans a year. This means that they have more than a one-off financial emergency. In fact, the loan is probably making their financial situation worse.
Are there alternatives to Payday Loans?
Sure. The short answer is any other source of funds. If you have a short-term problem, can you ask the person you owe for an alternative arrangement? Take money out of savings? Use a credit card? Borrow money from a friend? Sell something? Pick up some extra work?
Any of those things may make it easier to avoid a loan.
Also, payday loans are not the only short-term borrowing options. Many institutions, banks and credit unions offer overdrafts or other payday loan alternatives. The interest rate may be high, but it’s probably lower than what the payday lenders offer.
In addition, there are loans with other types of structures that may make it easier for borrowers to get the money they need—and to pay it off. Personal Loans like these are different than payday loans—they’re safer, smarter and a much better option.
Can you describe the difference between a Payday Loan and a Personal Installment Loan?
Most payday loans are set up so that you pay off the amount borrowed and all the fees at once, which is difficult for many people. With an installment loan, you pay off the loan in several payments, spread out over several weeks or months. Each payment helps reduce the total amount borrowed while paying some of the interest. This means that the payments are a manageable size and the loan gets paid off.
How can I tell if a lender is reputable or not? Are there red flags I should look for?
Absolute! Start with these: Is the lender licensed in the state where you live? How long has it been in business? How understandable is the paperwork? Do they make it clear what you will owe and how you will pay off the loan? If you do an online search, what shows up on the second or third page of the search results?
If someone is trapped in a cycle of debt because of a payday loan, what should they do?
It depends on how badly they are stuck, you know? Some people can get relief by refinancing their loan into an installment loan, which usually leads to lower interest and more manageable payments. Others may want to try credit counseling, bankruptcy, or a major lifestyle change in order to get it paid off.
If someone has never been told how to manage money or personal finances, what is the best way for them to get started right now?
A good way to start is by writing down every single thing you spend money on in a month. Every time you put money in a parking meter, buy a doughnut, or pay a bill, write the amount down. At the end of the month, add up the total amount spent. Then, compare that to the amount of money you brought in from work and any other sources.
Next, take a look at all of the expenses. Can you cut back on some? Are you spending money on something that you don’t care about?
You should also think about whether there’s a way to make more money. It could be as simple as making the case for a raise or a promotion. Can you learn a new skill that will help you get a better job? It doesn’t have to be expensive. There are a lot of great free resources online or at the library.
And learn to cook. It sounds really obvious, but the more things you can cook, the less money you’ll spend on food!
Why are payday loans legal? Will they always be or are states trying to curtail them?
This is a tough one. They are legal because they are useful for some people, and quite honestly, they are legal because they are profitable and the companies that offer them are good at lobbying state legislators.
There have been attempts to ban them, but they are hard to pass. Many lenders find loopholes, and you know what? As long as people want them, they will be there. One good way to make payday loans go away is to stop taking them out.
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