According to CareerBuilder.com, a whopping 61% of American households lived paycheck to paycheck in 2009. That number is huge, especially since only 49% lived that way in 2008, and only 41% in 2007. Whether it is due to losing one or both household incomes or simply a reduction in the household incomes, the statistic is staggering. With families not able to adequately save for any unexpected expense that may arise, they are finding that more often than not there is more month than money. So what happens when the rent/mortgage payment is due, groceries need to be purchased, and then the car breaks down? For some, a small personal loan at a local bank is all it takes to get back on track. For many though, this isn’t an option, and they only place they have to turn is payday lending, which may sound like a good idea up front, but in the long run can sink you deeper than you were before.
What is a Payday Loan?
At its simplest, a payday loan is simply a small, short-term loan meant to cover the borrower’s expenses until their next payday. They have many different names: paycheck advance, payday advance, and cash advances are the most popular when referring to payday loans, but the basic concept is the same. The borrower visits the payday lending store, secures the loan – $500 is the average loan – by providing proof of income, their Social Security Number (SSN), recent bank statements, and other personal information, and writes a post-dated check to the lender for the amount of the loan plus all loan fees.
That sounds pretty good, right? Go in, apply, leave with money the same day; what could be better? A lot. For starters, on the maturity date of the loan – usually within two weeks after the loan is approved – the borrower must either return to the store to repay the loan plus fees or face massive penalties for failure to repay on time. If the provided bank account doesn’t have sufficient funds, the borrower would incur a bounced check fee from their financial institution in addition to an increase in the loans interest rate. For families who were strapped before this vicious loan cycle, it would appear that there is no way out.
The Payday Loan Trap: How Borrowers get Caught Up
For a typical $500 loan, if the lender charges $25 per $100 borrowed, when the time comes to repay that $500 loan you will also be shelling out $125 in fees, making your total loan repayment a whopping $625. For people who were already strapped, an extra $125 in fees can put even more strain on their budget. If they can’t meet the repayment obligation they are forced to extend the terms of the loan incurring even more fees and penalties. Until the borrower can save enough to stop the...