Payday Loans: Boon or Bane?

Did you ever hear the term "bane of my existence?" It's an old one from some pretty dramatic writing. It refers to something that makes your life miserable. How about "boon"? That's probably a more familiar word. A boon is a benefit. You would think it would be pretty simple to sort out one from the other, wouldn't you? Not so when it comes to those tempting "Payday Loans." Every morning when I get ready for work, I have the local morning news station on. And every morning, I hear the same jazzy commercial, set to music, about how easy it is to simply stop into the storefront of this business and receive an advance on my next paycheck. Sound too good to be true? Well, there's a reason for that.

At most of these businesses, you can fairly easily borrow $100-$200 for a flat fee. The consumer writes a check to the payday loan business with the understanding that the check is not currently covered by funds in that checking account. When the next payday rolls around, the business can deposit the check and be paid back by the check amount, which includes a fee for this convenience. Or, the consumer can come by and pick up the check, redeeming it with cash or a money order. Again, a fee (built into the check amount you wrote) is charged for this privilege. Finally, the consumer may also elect to roll over the payday loan---by paying another fee. Can you guess how many people might just be tempted to roll over the loan? Many, as it turns out.

What if you are this consumer? Would it surprise you to know that this little, seemingly helpful transaction just cost you a HUGE amount in interest fees? Interest is not just the actual amount charged. If you are charged $20 for a $100 payday loan, you may be thinking that you are paying 20% interest. But it's much worse than that. You WOULD be paying 20% interest if you had the money for a year. But you don't have it for a year. The rate of interest paid is both the length of time you have the money and the amount you have to repay at the end of that time. So if you have this money in your possession only 10 or 12 days before you pay it back, as required by the payday loan agreement, your interest rate is more like 195% or even up over 250% in interest! This is quite a shock to those who see the payday loan as a way out of a temporary financial pinch. And think what rolling over such a loan week after week can do to you.

Many credit card lenders charge 20-25% for money you borrow from them, either in the form of interest charged on an outstanding balance, or on a cash advance. And cash advance fees may even be higher that the usual stated interest rate of the card. Yet, many of the same consumers who balk at those rates are payday loan customers. They simply don't understand what they are doing. How does this happen? The payday loan businesses are required by law to disclose the terms of the loans they offer. So why in the world would anyone "bite?" Take a look at the (literally) small print on such lending documents. It just is not evident at first glance to the average consumer what interest rate is being charged. And customers of these businesses are often in the lower income brackets, and may not be well-educated about what they are signing. All they may know is that they need the money, and it's being offered by this business.

What, then, should consumers do if they have a legitimate need for the kind of loan service offered by payday loan businesses? As with many, many financial questions, customers should contact their Credit Unions for assistance. At the very least, the Credit Union can explain far more economical ways to borrow money. Consumers are effectively borrowing money if they consistently live beyond their means, and if they consistently rack up more and more credit card debt. Most Credit Unions are an excellent source for the kinds of financial counseling which could help consumers get a real handle on spending and learn to manage money effectively. After all, remember that your Credit Union, a not-for-profit institution, really is there to serve you, the customer. They don't have jazzy commercials on the morning news usually, but they are there on your side. Give them a try.