Over 12 million US citizens every year use payday loans. The average amount borrowed is $375, and most people spend around 5 months paying them off. This makes their marketing as “short-term loans” rather misleading for most borrowers.
Payday loans are “short-term” loans that require you to have a checking account and income in order to qualify. Payday loans are normally used to help people fund everyday routine living expenses that they may be having trouble keeping up with. Many people use them to meet their rent payments or pay their utility bills on time, for example. The term “payday” is the key to the idea of these loans; they tide you over until your next paycheck. They are thus aimed at broke people who have no funds to spare and are struggling to make ends meet.
41% of payday loan borrowers end up having to use means such as their families money or a yard sale in order to pay off their payday loan. This is usually the sort of thing that they were trying to avoid having to do in the first place.
So why does this happen? Payday loans are different from regular loans, as you are supposed to pay the amount back completely in one payment. When you take out a payday loan, you are charged a fee. The idea is that you pay this fee and then repay the loan in a month’s time. However, many people fall behind financially and cannot afford to repay their loan all at once by the end of the month. They then can “extend” their loan by paying another monthly fee. What happens with many people is that they continually extend and extend their loan by paying fees upon fees as the months go on. This often means that borrowers will pay more in monthly fees than the initial amount of money they borrowed, and still are required to pay the amount they borrowed back in one full payment as well.
Most people use payday loans because they are too embarrassed to ask their family for money or sell their possessions for cash. However, the snowball effect that often occurs with payday loans will often require them to ask their family for money anyway, in order to pay off the mounting fees and debt.
Though some states (such as Colorado) have enforced laws that require payday loan companies to follow much fairer rules, most states still have payday loan companies that could be considered predatory. They have even been referred to as “legal loan sharks” by some.
Those who are broke and struggling to make ends meet should only consider a payday loan if they are confident that they will be able to pay it back in full quickly. Otherwise, you should probably look into alternative methods of getting some extra cash quickly, methods that don’t send you spiralling into debt. It is better to incur an overdraft fee than it is to fall into crippling debt.