Personal Finance Experts Recommend Furloughed Workers Avoid Payday Loans

Inside Subprime: Jan 23, 2019

By Lindsay Frankel

The 800,000 furloughed federal employees going without pay have each missed $5,000 of their income on average, according to the New York Times. And there’s no end in sight for the financial stress these workers will face. Personal finance expert Suze Orman called it “an emergency situation,” one that calls for borrowing from a retirement account.

But even in an emergency, Orman says, there are certain types of credit that federal workers should avoid at all costs. “I am begging all of you, do not take a payday loan out,” she said in a recent podcast episode. “Please don’t do it. If you do it, it will be the biggest mistake you have ever made.”

Payday loans are short-term, small-dollar loans that are fast and easy to obtain but difficult to pay back, what with annual interest rates soaring to nearly 400 percent on average. The average APR on a credit card is comparably low, even at the current all-time high of 17.47 percent.

Payday loans are a far cry from a short-term solution, which is how they are typically advertised. That’s because four out of five payday loans are renewed or rolled over, according to the Consumer Financial Protection Bureau, leaving borrowers in debt for months at a time. What’s more, “nearly one in four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit.”

While some states protect borrowers by capping interest rates on payday loans or banning them altogether, high-interest payday lending is alive and well in most states. Personal finance expert Michelle Singletary joined Orman in cautioning consumers against payday loans, stating that “Payday lenders are sharks.”

According to Orman, there are better methods of borrowing available to furloughed employees. She suggests putting purchases on a credit card. Still, it’s important to budget and plan to pay off the balance with back pay once the paychecks start coming in again. Workers can also take out their original contributions to a Roth IRA, usually without penalty. And borrowers who are eligible to get a loan from their Thrift Savings Plan (TSP) are usually not required to pay taxes or a penalty. As a reminder, Orman says, you should pay back the amount with interest within five years.

If these options fail, there are still ways to avoid taking out a payday loan. Paypal is offering cash advances of up to $500 without interest for workers impacted by the government shutdown. Each employee can only receive a one-time cash advance, but the company will issue up to $25 million in total during the program. If you need a small loan to get by, Paypal is a compelling option.

It’s possible that financial institutions will be understanding about the plight of the furloughed employee, so it’s worth contacting creditors to explain your situation. Inform credit card companies, for example, that you’ve missed paychecks due to the shutdown, and ask for an extension.

Orman also suggests restricting your spending during the shutdown by cutting out any unnecessary costs. “Every single penny has to go for something that you need,” she said.

For more information on payday loans, scams, and cash advances and check out our city and state financial guides including Florida, Illinois, Texas and more.