PayDay Loans are a growing trend in this present day economy, and Oh how evil they are. The state in which I reside allows Payday Lenders to register and operate legally. Not all States do, but in my State, there are as many Payday Loan stores in any given city as there are StarBucks or McDonalds. It is a crying shame because they do a very thriving business at the expense of people like me, the consumer.
Here is an eye opener for anyone who has not had a Payday Loan, the inner workings that lead to a cycle of debt. The maximum limit for a Payday loan differs from state to state as does the fees/percentage rate that can be charged. But here, where I reside, you can go to one lender and get the limit in my state, a loan of $1,000. This is a pay day loan, a draw against your next check. Keep that in mind, because you can then go to the next lender three doors down, and get another max loan of $1,000! Against that very same pay check! Yep, that is right. These stores have license to lend the max amount without checking your credit and on your good word alone that you can pay them back. I'm sure you can imagine what a mess this could turn out to be. An average consumer can pretty much get a draw way over and beyond what they actually bring home in their net pay. Hey, it really happens too. Sadly enough.
So, ok, you now have two $1,000 loans with terms of a finance fee averaging around $200 each, so payback due for a whopping total amount of $2,400 by next pay day. Yikes, what a mess you are in now. So, what happens if you don't have that much to pay back the lender and still have money to eat and pay bills? Your option? Roll-over. Yes, these companies are allowed to extend you the courtesy of paying the finance fee only, instead of paying back the loan in full. On top of that, you can do this up to three times in my state. Therefore, by re-financing these loans three times, and then paying them off on the fourth month, you would end up paying in total: $3,600!!! Now, if that isn't a fantastic business deal for the Payday Lenders! And for the consumer, well, they have really taken one in the shorts!
Now, one other option you have when re-financing these loans is to pay additional money toward the principal to buy down the final pay-off. So, say you put $300 toward the loan with the first re-finance. $200 goes to finance fees, $100 reduces the loan. You then owe $900 and have a reduced finance fee the next time, lets say $180. With your next payment, you can pay $280, reduce the principal to $800 with a re-finance fee of $160. Again, the next time, you pay $260, reducing principal to $700 and finance fee of $140. Then when your final payment is due, you owe $840 to pay it off. With this option you end up paying a total of $3,360 for the two loans, you saved a whole $240 overall. Whew.
I think you get the idea of how bad an idea it is to take a payday loan, or two, to get you through a financial crisis. Its a really bad idea! Believe me, and the sad thing is that consumers are getting caught in this trap over and over with very little hope of getting out. To actually get out of the mess, you have to have one lump sum of cash to pay them all off in full at one time. Its hard to see end to it in the near future for most consumers, they just keep plugging away, re-financing, re-loaning, getting deeper and deeper into the crunch.
Your best practice is to not take a Payday Loan, there are other alternatives, seek them out.
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