Payday loans are not what they seem. While they may appear to be a convenient “quick fix” for a temporary financial situation, they often result in a vicious cycle that can accumulate interest at rates of up to 780%.
Most Payday lenders require borrowers to give access to their checking account. Many loans come due in just two weeks, which is hardly enough time for the typical consumer to rebuild their finances to pay off their debt.
When the loans are due, they can take up 36% of a borrower’s paycheck on average. Most people can’t afford to sacrifice such a huge portion of their paycheck and still cover expenses, especially after they were just in a financial bind! However, when the Payday lender has access to their checking account, they can pull funds whether they are there or not, also creating overdraft fees for the borrower.
Often as a “quick fix,” the borrower takes another loan for another two weeks—essentially borrowing the same amount that they borrowed the first time, plus added on fees and interest. And then another. And another. Eventually, they find themselves in a debt spiral that can last five months on average. At HFLA we have seen borrowers borrowing and re-borrowing the same payday loans for over three years! The financial and mental stress is often devastating to these individuals.
The average loan is for $375 and the average fee for unpaid debt is $55 per pay period (about two weeks) on average. At the end of the five-month cycle, the borrower has paid over $500 in financial charges for a loan that was only $375 to begin with!
Twelve million Americans use payday loans annually. That’s entirely too many consumers putting themselves at risk of getting trapped in a vicious cycle based on predatory lending practices.
If you or someone you know is considering a payday loan, talk to us instead. The Hebrew Free Loan Association is a non-denominational organization that provides interest-free loans to those in need. We refer borrowers to other nonprofits that offer free financial counseling to ensure that they maintain healthy credit scores and receive financial advice designed to help them in the future.