The Millennial’s Guide to Avoiding Payday Loans
Inside Subprime: Oct 31, 2018
By Lindsay Frankel
If you’ve considered using a payday loan to cover basic expenses during a time of financial need, you’re not alone. According to a survey conducted by CNBC Make It and Morning Consult, 51 percent of millennials have considered using a payday loan, most commonly to cover rent, groceries, or utility bills. More millennials end up using these risky products than other generations. 13 percent of people ages 22 to 37 reported using a payday loan in the last two years. That’s significantly higher than the statistic for baby boomers, which sits at a low 7 percent.
Nick Bourke, director of consumer finance at Pew Charitable Trusts, told CNBC Make It that student loan debt is likely making matters worse. One in four millennials has racked up more than $30,000 in debt, according to a survey from NBC News and GenForward. Debt in high numbers can lead desperate millennials to utilize alternative financial products. Nearly a third of millennials also lack the financial literacy to make educated decisions about payday loans, according to a study out of University of Illinois.
What are payday loans?
Payday loans are short-term, small-dollar, no credit check loans that use the borrower’s paycheck as collateral. To take out a payday loan, you need to hold a bank account and provide the lender with proof of income. You’ll also write a postdated check coinciding with your next pay period, and the lender will cash the check if you haven’t paid off the loan in time. Payday loans are advertised as a quick way for borrowers with bad credit to access cash, but they cause undue financial harm to borrowers in the long-term.
Why should millennials avoid payday loans?
The payday lending business model relies on borrowers taking out repeated loans. A study by the Consumer Financial Protection Bureau found that almost half of borrowers rollover their loans nine times over a 12-month period. For millennials who lack financial security, it can be impossible to pay back a payday loan in the time allotted. Exorbitant interest rates and fees pile on, trapping borrowers in debt.
While some states prohibit or limit payday lending, many others place no limits on what a lender can charge, leading to triple-digit APRs. For example, payday loans in Idaho cost borrowers an average of 582 percent annual interest, according to 2016 data from Pew Charitable Trusts. That means it would cost $668 just to borrow $300 for five months. While payday loans may be the quickest way to access cash when you have bad credit, there are other solutions.
How can millennials avoid payday loans?
If you don’t have friends or family members who can help, check to see if you qualify for financial assistance programs in your state, like medicaid and food stamps. These programs can help defray the costs of basic living expenses that often lead to payday loan use.
Planning ahead with a savings account is the best way to stay out of debt, but if you’re in a bind, there are other options for borrowing money. Even if your credit score is low, it’s worth talking to banks and credit unions to find out if you are eligible for a loan with a lower interest rate. Some employers also allow advances on future paychecks, which can be useful if you’re facing an emergency. You may also qualify for an installment loan with a lower interest rate, and this option will also boost your credit score, unlike a payday loan.
If you’re in need of fast cash, take a moment to consider all your options. Payday loans may seem like an easy solution, but they can lead to long-term debt that is difficult to overcome. See how one millennial ended up with $50,000 in debt from using high-cost loans.