In fact, they can put you at financial risk. Payday loans are targeted to those who are struggling financially, just starting out, or living paycheck-to-paycheck. They seem appealing because of their easy access and, unfortunately, wide acceptance. In reality, payday loans can create a cycle of indebtedness, hurt a person’s credit score, and cost consumers an exorbitant amount in fees.
What payday lenders promote:
- No credit check
- Get your paycheck early
- Quick and easy money
How payday loans create an unwanted cycle of debt:
- APRs can range up to 800% or more¹
- Lower-income neighborhoods are targeted (and suffer most)
- Extended terms, added fees, and bounced checks all lead to more payday loans
The reality of how payday loans work:
Many people are attracted by the thought of quick money to help with bills, unexpected expenses, or even necessities, like groceries. And yes, payday loans can give you early access to your paycheck. But the loan comes at a mighty high price – up to 800 percent or more in annual interest¹. While this seems shocking, it is the reality of payday lending.
If you (or someone you know) has tried this type of loan, you may have seen it as a quick-fix or one-time deal. Mainly with the expectation you’ll repay the money with your next paycheck. The process starts innocuously enough with you providing proof of employment plus your credit union or bank statement. Next, you’re asked to write a personal check payable to the lender to cover the loan plus a fee. (While terms vary by state, the lender may ask for a post-dated check or a check dated the same day you receive the loan.)
The fee, a finance charge ranging from 15 to 30 percent, is even more costly than it sounds. Because the loan is due by your next payday, fees that seemed somewhat feasible quickly escalate. When you calculate the finance charge as a comparable annual rate, it can be up to the equivalent of 800 percent APR. (400 percent APR is the industry average².) Not only are payday loans expensive, many consumers become trapped in a destructive cycle.
What happens? Payday rolls around, and quicker than you think the loan is due. You’ll need to return to the lender or go online to pay it off. If you don’t, the lender deposits the check you originally wrote. And if you can’t afford to repay the loan, terms may be extended – but for more fees. You may also need another payday loan to catch up from the last check you forfeited, and then another, and so the cycle begins.
We can help
If you’re on the verge of getting a payday loan, stop and see us first. We can sit down and review your situation and offer more affordable options, such as a fixed-rate loan, line-of-credit, or low-cost credit card. At ECCU, we always look at the entire relationship, not just your credit score, for the best possible deal.
Equally important, we encourage you to start a savings plan. With a little extra to fall back on, you can alleviate the stress of unexpected bills and be better prepared for emergencies. Try our online budgeting tool and direct deposit to get started. However, if you find yourself in a more serious situation, please contact us right away for some helpful financial coaching.
Why financial coaching works
First, it’s reassuring to know you don’t have to go it alone. We’ll work out a plan to strengthen your money situation – which may include a budget, sensible spending plan, paying down debt or debt consolidation. We also have our financial coaches at GreenPath. These advisors are professional, compassionate and committed to helping. All services provided by GreenPath are free and completely confidential.
We’re here for you
It’s okay. Sometimes we all need cash for the unexpected. Just remember there are alternatives to costly payday loans, and know that we’re here for you. We can help you to navigate life’s challenges without taking unnecessary risks.
Affordable alternatives to payday loans:
- Establish a payment plan with a creditor or service provider
- Apply for an ECCU credit card or credit line
- Take a cash advance on your credit card
- Ask your employer for the advance instead
- See if a relative can help with a small loan
- Talk with creditors (ask for more time or an extension on the bill)
Free Up Your Cash Right Away
Ideal for debt consolidation or short-term needs, personal loans from your financial institution are available with low rates, and at ECCU, offer up to 60 days until the first payment is due. More importantly, they’re an honest-to-goodness value, with no strings attached.
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