Payday Loans: A Tax for People Who Are Bad at Math?

Some people really hate payday loans. Others just loathe them. Payday loans are, in a very limited number of circumstances, a viable method of last resort. They should never be your first choice.

Yet, some folks continue to take out payday loans, and sometimes to take them out week after week. They argue that the payday loan fee is relatively small, regardless of what the interest rate on the sheet of paper they signed says.

“So, what if the Annual Percentage Rate is 400 percent? I’m not borrowing for a year, just for 2 weeks” they say. Then, they wind up renewing the loan over and over again, sometimes for a year or more.

Let’s take a look at some of the basic math involved in a payday loan. Let’s say your lender wants to charge you $8 for each $100 you borrow. That’s not too bad, right? It’s actually very low – many payday lenders may charge as much as three times that amount. For argument’s sake, though, let’s stick with the $8 per $100 borrowed.

If you need $200 to get your car fixed, you’re going to pay the lender $16 to get you through until next payday. That doesn’t sound like a bad deal. Here’s the problem, though: chances are you didn’t budget $200 from that next paycheck to fix your car, either. So, you’ve got to cut back somewhere else (think Macaroni and Cheese for 2 weeks) or you’re going to have to renew the loan.

The majority of borrowers renew the loan for at least one more pay period. So, let’s say you do just that. Now, you’re at $32 in fees for that $200. It’s getting a little bit hefty, now. Now, you’re at or past what your bank would charge you if you’d have bounced a check.

So, come next payday, you decide that, no matter what, you’re paying part of the loan. So, you pay off $50 of it and renew the rest. Now, you’re up to $44 in fees. If you do the same thing for the next two pay periods, you will have had the loan for about 3 months and paid a total of almost $60 in fees.

The truth is that it takes most folks much longer to pay off their payday loans without renewing them, and by the time it is all said and done they’ve paid more in fees than the original loan amount. That’s just not a sound financial situation. Unless you’ve got no other recourse and it’s a matter of something that can’t wait, you should avoid taking a payday loan.

Why Payday Loans Rock

OK, I know. Everyone else out there is telling you that payday loans are straight from the pits of hell, that they were designed by a secret Nazi-Soviet alliance of evil accountants to break down the American financial system. To some degree, these theories are probably right. Some states have even banned payday loans outright, and the federal government has set limits on whether or not military personnel can take out payday loans.

However, there are times when payday loans are expedient and useful. Here are a few reasons that payday loans rock:

There’s no risk of a broken leg. While critics will compare payday lenders to loan sharks, the fact is that if you don’t pay back a payday loan no one is going to come and break your leg. They will turn you over to a collection agency, which can be annoying as hell, but they won’t break your leg.
It beats getting fired. Sometimes, you gotta make the hard choices. Sometimes, it’s a choice between taking out a payday loan to pay the repair bill on your car and being able to get to work. Yeah, you should explore other options, such as borrowing money from a family member or even taking the bus to work until your next payday. But, those aren’t always viable options.
A payday lender isn’t going to judge you. They’re used to working with folks with bad credit. They’re not going to peer down at you from across their desk and complain about how you paid your mortgage late for the past six months. They’re going to ask you how much you want, ask for proof of your income, take your check, and give you money.
A payday loan is a measure of last resort. You don’t ever want to get to the place where you have to take out a payday loan. But, it’s nice knowing that it’s there if you wind up needing it.
You can get them just about anywhere. The payday loan business has expanded greatly in the past couple of decades. There are even payday lenders who will loan you money online. Depending, of course, on the regulations in your state, you may not be able to get a payday loan at all, but if they are legal in your state chances are there’s one next to every Starbucks.