Blog Sample - Just Tricks, No Treats: Why Payday Loans are Predatory

Every Halloween, ghosts and ghouls take to the streets in search of a bag of Skittles or a Snickers bar. While passersby gawk and balk at man-eating zombies and two-headed monsters, the real dangers aren't hiding behind rubber masks and bloody makeup. Instead, they're lurking where we don't expect them: Payday loan stores in Any Strip Mall, USA.

In fact, payday loans are so scary that they're known as predatory practices. They feed on the vulnerable, they take advantage of the desperate, they ruin the finances of the down-on-their-luck. And they do it all under the guise of helping.

What are Payday Loans?

Payday loans are essentially cash advances on your paycheck; they’re short-term, high-interest loans based on your income. 

The way they work is simple: You walk into a payday loan store, show them proof of employment, walk out with cash, and pay it back once you receive your actual paycheck. But you don't only pay back what you borrowed; you pay back a much higher amount. On Halloween and every other day, payday lenders act like vampires. 

How Much Do They Cost?

The true cost of a payday loan depends on where you live. Some states have laws that forbid these types of loans altogether, while others limit the loan amount, interest rate, and term.

The rules vary widely, especially regarding loan amounts and interest rates. In Colorado, payday loans can't exceed $500; in Oregon, they can't exceed $50,000. 

In 17 US states (as well as the District of Columbia), interest rates are legally limited to 36%, but other states are more predator-friendly. Several states have mind-blowingly high interest rates, including Utah (652%), Nevada (652%), and Texas (664%). 

If you took out a $500 payday loan in Iowa (the maximum limit) for 31 days (the maximum term), you'd end up paying back $643 (after factoring in the average APR). But that’s only if you pay it back on time with no extension.

While doing this once or twice might not seem that harsh, many people find themselves stuck in the payday loan cycle. On average, it takes borrowers five months to pay back loans, and 25% of those loans are reborrowed nine times. All of this adds up fast and furiously, filling your bank account with cobwebs instead of cash. 

Why are they so Dangerous?

Among the biggest reasons why payday loans are so dangerous was already mentioned above: They feed on the vulnerable. Yet that's far from the only thing about this practice dripping with deception. 

In regular lending, banks, credit card companies, and mortgage companies only lend to people with strong credit scores that attest to their ability to repay the loans. Payday loans do the opposite: They specifically target those with poor credit.

Doing this helps the payday lender make more money: They loan to someone with a poor credit history, the borrower fails to pay the money back, the lender adds on late fee after late fee after late fee while racking up interest, and the cycle continues.

Most payday loan stores go much further in their deceit. They’re not transparent or upfront about their fees and interest. They encourage you to take a loan higher than the amount you truly need. They require a lump-sum payment instead of smaller, easier-to-manage monthly payments. They never report your loan to credit agencies unless you end up in collections, which prevents you from building your credit and keeps you committed to using them. 

As a general practice, they require access to your bank account as well; they set up automatic withdrawals and never allow you to repay the loan any other way. This means that they begin garnishing your wages as soon as you sign on the dotted line. If you don’t have enough in your account when they go to collect, you’ll be subject to overdraft fees and fines by your bank. 

Perhaps the most potent way payday loans hurt borrowers is through loan extensions. Payday lenders may encourage you to extend your loan even if you don’t need to, typically pretending that it's in your best interest. But the only interest it's in is theirs…... in the form of APR. The longer you extend your loan, the more you pay.

Payday Loan Alternatives

The good news about payday loans (perhaps the only good news) is that they come with plenty of alternatives. If you find yourself stuck in a rut of financial insecurity, look elsewhere for solutions. 

A few of the alternatives worth trying include:

⦁ Credit union loans

⦁ Payday alternative loans

⦁ Bad credit loans

⦁ Financial assistance programs

⦁ Lending circles

⦁ Family and friends

In the end, payday loans should be avoided whenever possible; they are always a short-term fix with long-term damage. Whether it's Halloween or not, they're only a trick and never a treat.