- [Narrator] Within a week of being paid, all the money is gone and you still have bills to pay.
You've scraped and pinched everywhere you can, but there's just not enough to cover what you need.
- With nothing in savings, no credit cards to utilize, and poor credit, what alternative do you have?
Should you visit the dreaded Payday lender?
(light music) - Payday loans, also called cash advance loans, are advertised as a short-term relief when you're in a financial bind.
they are meant to be for small amounts, usually up to $500, which the consumer intends to repay with their next paycheck.
- To some, it may seem enticing to go this route.
For starters, the application process is pretty simple.
Only requiring an Idaho, proof of income, and a bank account.
Once the process is finalized, you can get your money the same day.
- Sounds attractive, but to see the real cost we'll have to (drum roll) - [Both] run the numbers.
- Paula has a full-time job as a server in a restaurant, but a bout of COVID forced her to miss several shifts.
Coupled with the recent increase in gas prices, she's found she doesn't have enough for this month's rent.
With the moratorium on eviction's lapsed in her state, she doesn't wanna do anything to aggravate the landlord.
So, she considers taking out a Payday loan.
It's just $500, she thinks, I should be able to pay that off.
She completes the application online, presents the required documents, and the funds are deposited into her bank account within 24 hours.
Whew, crisis averted.
- Or has it just begun?
Obtaining a Payday loan is easy, but the interest rates are high, really high, like Woody Harrelson high.
Paula's lender charges $20 for every hundred dollars borrowed over a 14-day term.
That's an annual percentage rate of around 500% - After another lackluster couple of weeks at work, Paula unfortunately only has $150 left over, far from the $600 she now owes.
When the lender tries to automatically deduct it from her account, it triggers a $35 overdraft fee from her bank.
If she pays the $100 of interest on the loan, the lender will graciously allow her to roll over the debt tor another two weeks.
Paula has already paid $135 in fees and interest and she's not one inch closer to paying back the loan.
- It's estimated by the Consumer Financial Protection Bureau that 80% of Payday borrowers fail to pay back the loan in full within the 14-day term.
And that the average loan of $375 takes an average of five months to pay back.
By which time the total cost is around $1,000.
That's not including any late fees or overdraft fees their banks or credit unions may have charged them.
- Payday loans are considered predatory for two main reasons.
Their high interest rates and the fact that they do not practice underwriting.
Underwriting is the process of investigating a prospective borrowers finances to verify whether they will be able to pay back the loan.
If you've ever applied for a mortgage or a credit card, you've gone through it.
But many Payday lenders don't bother with underwriting.
It's almost as if they want customers who won't be able to pay back the loan so that they can trap them in a never ending nightmare of fees and interest.
- In 2017, the CFPB issued a mandatory underwriting rule that would compel Payday lenders to check whether a borrower could handle a loan before issuing it.
However, the rule was revoked in 2020 under the Trump administration.
- After five months, Paula has paid close to $1,000 in interest and fees without even making a dent in the original $500 loan.
She's starting to realize that this short-term solution has become a long-term problem.
So, what can she do?
Assuming she's exhausted her options for scrounging up extra cash, she could borrow more money like taking out a personal loan from her credit union or paying off the loan with a credit card.
But most people who resort to Payday loans do so because they can't qualify for other types of credit or have already maxed out their cards.
- Paula considers defaulting on the loan, after all, her credit score is already in the dumps.
But if she thinks the lender will let her off the hook, she's dead wrong.
Payday lenders will refer delinquent borrowers to collection agencies and even take them to court over sums as small as a few hundred dollars.
They can put a lien on your house or garnish your wages.
- There is of course the B word, bankruptcy, but before she considers that option, Paula should contact the lender directly and try to negotiate a settlement.
Lenders would almost always rather get the money directly from the borrower than sell the debt to a collections agency.
And they're often willing to settle for as little as half the full amount, especially if Paula mentions that she's considering declaring bankruptcy.
In which case they'd get nothing.
- Even if Paula makes it out of this jam, she'll undoubtedly wish that she'd never gotten into it in the first place.
Payday loans are almost always a bad idea.
If you need cash fast, sell some possessions, pick up extra work, borrow from friends and family, even take out a new credit card.
Almost anything else you can do, that's legal is preferable to a Payday loan.
Of course, keeping a strict budget and having an emergency fund can protect you from even being in such a vulnerable position.
- Listen, we may all find ourselves in a financial bind at some point and borrowing money can be a lifesaver when unexpected crises arrive.
- But you have to make sure that what you're swimming toward is an actual lifesaver and not a shark in disguise.