A payday loan is basically a paycheck advance, also referred to as a payday advance and it is one of the biggest financial mistakes you can make. Ever borrowed from a “loan shark”?
The purpose of this type of loan is to cover a borrower’s expenses for a short term, until their next paycheck comes in. I like to refer to these types of loans as “mafia loans” or “loan sharks” because of the amount of interest that is charged.
Most loans range from $100 to $500 and the balance is due and payable in two weeks. Interest rates can range anywhere from 400%, and even as high as 900% APR.
How does it work?
These types of lending stores usually have small locations in strip malls within the city. A borrower can walk in and is required to furnish one or more pay-stubs, along with their most recent bank statement, to prove they have a steady source of income. In order to secure the loan, the borrower is required to write a post-dated check to the lender for the total amount of the loan, including the fees that are being charged. The finances charges are usually 15% to 30% of the amount being borrowed for the two week period.
Re-payment for the loan is expected to be in-person. If the borrower fails to show up, then the lender will deposit the check directly, or process an electronic withdrawal directly from the borrower’s bank account. If there is not enough money in the account to cover the check, not only does the bank charge a non-sufficient funds fee, but the loan store is going to charge additional fees or an increased interest rate because of the failure to pay.
Why this is so stupid…
This type of company is basically charging you an arm and a leg for the use of their money for only two weeks! You work hard for your money. Why would you want to give back such a big chunk? It’s basically just throwing money out the window.
Learn how to budget your money and make it last until the next time you get paid. Better yet, take that $30 or $80 finance charge you were going to pay and put it in savings. That way, next time you’re in need of cash before you get paid, you can withdrawal it from your savings instead! Now that’s a novel idea!
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