Credit Debt

How a short term loan can have long term consequences

A payday loan is marketed as an advance on your paycheck -- it's a short-term loan (around two weeks) that typically ranges from $50 to $500, plus a fee.

I know what you're thinking . . . that doesn't seem so bad. So, what's to fear? I worked for a payday lender right after I graduated college. Sure, many people were able to get a loan, pay it off right away, and be on their way. Unfortunately, I witnessed many others who experienced the negative effects of payday loans.

They Have Incredibly High Rates

If you're anything like me, the phrase "interest rate" doesn't really sink in until you see how much you're paying. So let's say you take out a payday loan for $100, with a $15 fee. It may seem like a small amount, but that is roughly equivalent to an Annual Percentage Rate of 391 percent! According to a Pew Charitable Trust survey, Payday Lending in America, the average payday loan borrower spends $520 a year on interest.

It Can Be a Vicious Cycle

I rarely saw new faces when I worked for a payday lender. Payday loans are marketed for short-term use only, but an estimated 69 percent of borrowers use them for recurring bills, like utilities or rent. 

Payday lenders make money by getting you to come back. As an employee, I was trained to actively encourage "rollovers," where you pay back your loan and immediately get another one. In fact, the average payday borrower has a loan out for five months out of the year -- so much for a quick fix!

Lenders Have Access to Your Accounts

By taking out a payday loan, you give out your checking account information and the permission for the lender to take out the loan and fee amount. I can't stress enough how important it is that you truly can pay it back right away.

Payday lenders will deposit your check every payday in an attempt to hurry and get the funds. So imagine already dealing with the stress of money issues, only to wake up and check your account to find the payday lender beat you to your paycheck that was direct deposited.

They Can Negatively Affect Your Credit

In my experience, payday employees are trained to aggressively attempt to collect. In fact, I have witnessed employees stopping by past due borrowers' homes or places of employment in an attempt to make contact. And they are often quick to charge off the debt and report you to credit agencies rather than working with you at all.

Payday loans don't solve your financial problems. Act in good faith and reach out to your creditors at the first sign of financial difficulty. Once you're on your feet, set aside small sums of money (like the amount of payday loan fee) into savings so you'll have a buffer. If you absolutely need a loan, a not-for-profit credit union is generally your best bet.