Money Matters: The truth about payday loans
By Senior Airman Michael Davis, 78th Comptroller Squadron
/ Published July 10, 2015
ROBINS AIR FORCE BASE, Ga. --
"Have Bad Credit? Need Cash fast?"
We've all seen the advertisements about payday loans.
They claim they can give you up to $1,000 in less than 24 hours - regardless of bad credit.
That might sound good to someone in a pinch with a family emergency, but do you really know what you're getting yourself into?
A payday loan is also referred to as a check advance loan, a cash advance loan, a post-dated loan, or a deferred deposit loan.
Regardless, the process is the same: The borrower writes a check to the lender for the amount they want to borrow, plus the fee charged to borrow the money. The lender then gives the borrower the amount of the loan - minus the fee, and holds the check until your next payday - usually about two weeks.
The amount owed is debited out of your bank account on your next payday. If you can't pay the loan off by the due date, the business will give you the option of extending the loan for two weeks - with another fee charged. That's where they make their money, and it can get very expensive over time.
The fee charged for taking out a loan can vary, it can be a percentage of the loan face value or it can be based on how much money is borrowed.
For example, you want to borrow $500 and the fee is 15 percent, you end up paying $575 if you pay off the loan in two weeks.
If the fee is based on increments, let's say a $15 fee for every hundred dollars borrowed, you would end up paying the same amount. Either way you're still paying $75 to borrow $500 for two weeks. Many don't realize how much they're actually paying to borrow the money, and it only increases when the loan is rolled-over.
Each roll-over incurs another fee.
Using the previous example, if you borrowed $500 initially, and you extended the loan another two weeks, you incur another $75 fee, bringing the total amount of money you owe the lender to $650.
This gets out of control fast, and there are no payment plans for payday loans. The lender wants their money paid in full, and if you can't afford to pay it off, you're forced to continue rolling the loan over.
Payday loan shops have very few customers when compared to other businesses, but still have the same expenses as other businesses; payroll, office space rent, office supplies, etc.
In order to pay their expenses and make a profit, they charge customers high interest rates to borrow money. They want customers to roll over the loan as many times as possible to get the highest profit.
A credit card's average annual percentage rate is usually between 14 and 21 percent, but if you were to convert the APR for a payday loan it would be well over 300 percent.
To give you a better understanding of how high the interest rate is let's go back to our example. You borrowed $500 at a 15 percent fee for two weeks. If you extended the loan for a whole year, in two week increments, your simple APR would be 390 percent or 15 percent times 26 weeks). That's 26 times higher than the average interest rate for a credit card.
The Military Lending Act protects military consumers from paying interest rates higher than 36 percent; however, the payday loan shops are aware and take full advantage of nebulous areas in the act.
The MLA shouldn't be your first defense against a payday loan. Your best defense is a good offense. Have a budget that includes emergency funds, stick to your budget, and steer-clear from payday loans completely.
The Airmen Family and Readiness Center offers financial counselling and can assist in building a budget. In an emergency, they can also put you in contact with a helping agency for a grant or loan and your local finance office can see if you qualify for a pay advance.
Don't rely on pay day loans to save the day. Plan for the unexpected.