The Payday Loan Problem

Many of us live paycheck to paycheck, but if you can’t pay you with your paycheck something is very wrong. After all, you report to work and get the job done, not your creditors. So why should they get most of your money? The answer is they shouldn’t and you have the power to change that today.

For people like this, a payday loan may seem like an instant solution, but the truth is it isn’t. The problem is the interest rates and exorbitant penalty and other fees.

This is a real life example: (Originally reported in the Chicago Tribune.)

  • Payday Loan Amount: $182.68
  • Interest Rate: 573.57%
  • Cost of Payday Loan: $557.58 (More Than 3 Times the Principal)

The Payday Loan Cycle

Basically payday loans are designed in order to help with emergencies or expenses that come into our lives unexpectedly. Ideally payday loans will be paid off 2 weeks after they are borrowed or upon the next “pay day” of the borrower. Unfortunately this is not the usual case.

In order to receive the loan the borrower will usually give their checking account information in order that the payment can be taken out automatically on their next pay day. This assures the payday loan company that they will at least get an opportunity to collect fees even if the full loan cannot be recovered from the checking account balance.

Most borrowers simply can’t afford to pay back the full amount like originally intended on their next payday. This forces them to “renew” the loan, (certain interchangeable terms will be used to describe this), meaning the borrower will end up paying back a fee which may range anywhere from $8-$15 for every hundred dollars borrowed every 2 weeks (this differs with each payday loan company give or take a few dollars either way). This money usually does NOT come off the principle amount borrowed. Not even a penny of it.

To put it simply, if the payday loan is for $1000 and the borrower can’t afford to pay the full amount back, they will usually end up paying about $150 every 2 weeks (give or take a few dollars on either end, this depends on the payday loan company) in order that they can owe the full $1000 again. Does that make sense? Of course not, but it’s the unfortunate payday loan process.

So what happened? Here’s what happened. The borrower paid the payday loan company $150 in 2 weeks time and still owes the full amount. Most of the time this cycle continues every 2 weeks for a long period of time. We have heard nightmare stories of this happening for years without a dime going towards the principle borrowed. This can stop and can be controlled but a different course of action must be taken.