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Payday Loans Can Be Eternal

by Shannon Cahoon / April 4th, 2018


Once upon a time, before my husband met me, he went to a payday lender. The process of getting a payday advance was easy, so he went back for another loan. And another.

It's so easy to fall into that trap. Fortunately, my husband wised up quickly and used nearly an entire paycheck to pay off his debt completely.

The two weeks that followed were anything but luxurious for him. He bummed rides to work and food from friends, and was just generally a bum until his next payday rolled around.

It took him a few additional paydays to catch up on the rent he owed his roommate.

The lesson here? Payday lenders are not a good idea—not ever. Once you get stuck in their cycle, it's nearly impossible to get out.

One reason why is they don’t disclose the rate of interest. Some mention their financing charges, others might even suggest a rate of interest, but if they had to follow the same strict disclosure rules as credit unions, fewer people would borrow from them.

To calculate the actual interest rate you'd pay on a payday loan, decide how much you want to borrow, find out the finance charge, and determine how long you want the loan to last.  

Let’s assume a loan of $400, a finance charge of $50, and a 14-day term that will last until your next pay check.

  • Divide the finance charge by the amount financed. $50/$400 = .125.
  • Multiply the answer by the number of days in a year. .125 x 365 = 45.625.
  • Divide the answer by the term of the loan. 45.625/ 14 = 3.2589.
  • Move the decimal point to the right two places and add a percentage sign. 325.89%

Payday Loans Can be Eternal

Yes, that is the actual interest rate—more than 300%! It can be even higher if the lender has a “fee per $100 borrowed” type policy, instead of a flat finance charge.

And it isn’t just payday lenders—rent-to-own places have a very similar setup.

A great alternative to payday lenders is credit unions—several of whom offer small loans to help you with whatever emergency cropped up.

Even better is to build a savings account that will act as a buffer between you and life’s unexpected curveballs.

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