Credit Union Difference
Payday Loans Can Be Eternal/ April 4th, 2016
Once upon a time, before my husband met me, he went to a payday lender—something I never would have allowed. He quickly discovered that the process of getting a payday advance was easy, so soon 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 and paid his debt off completely.
Most people don’t have that luxury—and the two weeks that followed were anything but luxurious for him. He bummed rides to work from friends, bummed food off friends and relatives, 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 are stuck in their cycle, it can be nearly impossible to get out.
One reason why is they don’t disclose the rate of interest. They might talk about their financing charges. Some might even suggest a rate of interest, but if they were held to the same strict disclosure rules as credit unions and other traditional financial institutions, fewer people would be convinced to visit them.
Consumer Federation of America tells you how to calculate the actual interest rate you'd pay on a payday loan:
Gather the info
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.
Do the math
- 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%
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.