Loan Shark: Payday Lenders are on the Prowl
Every deal isn't a great deal. Many college students and young adults are learning this lesson the hard way as hundreds of check cashing establishments and payday loan stores sprout up like weeds around and near college campuses, military bases and low-rent apartment complexes.
Neon flashing signs adorn the windows of payday loan stores touting "fast cash," and radio ads boast of how quick and easy it is to borrow the money you need. It all sounds so simple. In fact, it seems to be the answer you're looking for. All you have to do is write a post-dated check that is the same day of your next paycheck and they give you the cash you need on the spot. Right? Well, not exactly.
As the saying goes, "The devil is in the details" and no statement could be truer than when speaking of payday loan establishments. It's true that they hold your post-dated check and don't cash it until your next payday. And yes, these lenders will provide immediate cash, often with no background or credit check.
But what the ads don't mention is the outrageous interest you will have to pay back on the loan. A typical payday loan is generally a two-week loan for $200 with a $30 fee. At first glance that seems fair enough - after all, you are in a jam so you expect to pay for the pinch you're in. But did you know that at $15 for every $100 borrowed you're paying back the loan at a 390% interest rate?
Payday lenders know that it often takes naive borrowers a long time (and lots of fees) to figure out a simple fact: If you didn't have enough money this week, you probably won't have enough to pay them back plus cover your other bills within a two-week period.
In fact, they're willing to bet their business model on it. Payday lenders count on you to roll the first loan over - again and again and again. The small fee that you were charged for the first loan quickly adds up to a hefty amount that is actually larger than the original loan. Payday lenders cash in on your financial misfortune. Roughly 10% of all payday loans are made to people ages 18-25, according to Vicki Jacobson, president of the Foundation for Credit Education in St. Louis.
OK, maybe you went over the limit on your credit cards and haven't paid your cell phone bill in two months. Maybe you've just found yourself in an uncomfortable situation with your creditors that you need to resolve quickly.
Don't panic. The important thing to realize when you're in a tight financial situation is that "if it can be fixed with money, it isn't really a problem." I know that might seem trite and easy for me to say, but coming from a former debt-strapped college student, I can assure you I know how you feel.
Here are some alternatives to borrowing from your already stretched paycheck:
- If you have never been late or over the limit on your credit card (or at least not in the last six months), contact the credit card company and ask for a waiver on your monthly payment. You'll still incur interest charges but the extra breathing room could help relieve the pressure.
- If you don't already have a relationship with the campus credit union, now might be your time to get one because some credit unions offer a lower-cost small loan with an APR between 15% and 18%. When you compare that to a payday lender's rate of 300% or more, the choice is a no-brainer.
- Make payment arrangements, especially with utility companies. During the winter months there are laws in place that protect consumers from having certain utilities (i.e. gas, electric, water) turned off due to non-payment.
- Ask a friend or relative if you can borrow the money. But before you ask for the favor, show that you are responsible and have every intention of paying the loan back by working out a repayment plan in advance to present to them. This level of commitment could go a long way in getting the cash you need.
The bottom line is that repeatedly using payday loans will likely lead to a debt trap that is difficult to escape. Re-examine your current income and expenses, figure out your "money wasters" (i.e. things you're buying that you could do without) and commit to "pay yourself first" so you always have an emergency cash reserve to borrow from.
Sanyika Calloway Boyce is the author of four books. She travels nationwide to educate, empower, entertain and enlighten students about money, credit and debt. This former debt-strapped college student shares real and relevant money messages that young adults can relate to and understand. Visit her online today at www.financialfitnesscoach.com.
© 2008, Young Money Media, LLC. All rights reserved.
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