Payday Loans

Payday loans are also known as cash advances. They should be seen as a “last resort” funding option and they are not recommended under any circumstance. Payday loans are very often linked to usury, which is defined as (a loan with) high or excessive interest. Over the past few years, many U.S. jurisdictions have implemented limits and restrictions on payday loans given that, in many instances, “criminal” levels of interest were being charged. This practice resulted in loan recipients getting trapped in a "payday loan cycle", with interest and fee payments being made but no actual payments being applied to the principal loan amount.

Obtaining a payday loan or cash advance is far too simple. There are loan shops in nearly every city and town throughout America, and many lenders now allow you to take out a loan online. All you need to take out a cash advance is valid identification, bank account information, and proof of income from your employer (usually in the form of the pay stub from your last paycheck). You do not need good credit to get a payday loan because the lender is securing their fees, interest, and principal loan amount repayment with your next paycheck. With many lenders offering “no credit check" loans, you can get these short-term loans with less-than-perfect or even bad credit.

Loan amounts vary among lenders, ranging $50 to over $1000. Loan interest rates are generally 15% for a two-week period, which means that the Annual Percentage Rate (APR) for a $100 loan would be 400%. This is an excessive APR by all accounts. Most loans have fees and additional interest that trigger in the event of late payment and/or non-payment. It is very easy for these loans to balloon and spiral out of control quickly. It has been reported that there are payday loans, cash advances, and title loans being issued in the U.S. with an APR of up to a 5000%.

There are very few positive attributes to a payday loan or cash advance. If you’re facing a true emergency, such as a medical issue, and you know you will not “fall short” on your next paycheck even with the loan repayment factored in, this may be a one-time option that helps you meet your immediate cash shortfall. However, it is important to evaluate your options before taking out a loan. You may be able to work with your creditor to determine a payment plan; you might be able to put the needed transaction on an existing credit card; it's possible you could obtain a pay advance from your company; if approved, you could tap into your bank’s overdraft protection; or, it may be as simple as asking a relative or friend to help you "bridge the (cash) gap" until your next paycheck. The best option is putting aside a small percentage of your monthly earnings into an emergency fund. If you get into a situation where you need immediate cash, you’ll be able to pull from this special fund to cover off your needs.

It should be noted that the Consumer Finance Protection Bureau (CFPB) is taking affirmative actions to protect consumers from predatory payday lending practices. As recently as 2016, the CFPB has proposed new rules governing how lenders determine a loan recipient’s ability to repay the debt. On their website, there is a wealth of information and warnings regarding payday loans and cash advances. There is also significant information available online that focuses on payday loan demographics, marketing practices, and other related topics that suggest that many lenders are targeting certain at-risk households throughout the United States.

Many U.S. states have usury laws. As previously discussed, usury is when high or excessive fees and interest rates are charged on a loan. However, many payday lenders are using the loophole of partnering with out of state banks and financial institutions to exploit consumers in states with tougher laws. It is recommended that you take the time to research these laws prior to committing to a payday loan.

Prior to taking out a payday loan or cash advance, it is highly recommended that you step back and wholly assess your financial situation. Ask yourself questions such as (1) is this really an emergency that warrants a cash advance? (2) if not, can I wait until my next paycheck to cover the expense? and (3) if so, do I have the ability to pay back the loan in full plus fees and interest rates when I receive my next check? This self-assessment will give you the situational awareness you need to make a good decision and avoid potentially becoming trapped in an unsavory loan relationship.

Tip 1: Financial responsibility and maturity are key to avoiding instances where you’d need to take out a payday loan, cash advance, or title loan (a short-term loan that uses your car or truck as physical collateral for the debt). No matter what you earn, putting aside 5% of your monthly income as an emergency fund will likely give you the ability to cover most emergencies after saving for 12 months. As a consumer, the onus is partly on you to avoid situations where you’d need to potentially compromise your financial stability or well-being. It is important that we all think ahead and create contingency plans for the proverbial "worst case scenario."