The current status of banking in the United States is much unlike any culture in the history of the world. There is much more capital to invest, and because of fractional reserve banking, there’s just so much money to loan out. Before only people who could surely pay off a loan would be able to get one, but this is no longer the case. The sheer amount of money available to be loaned has increased so dramatically that bankers and finance companies have found ways to make it mathematically viable to loan money to people who won’t always pay the money back.
One of the most common types of these sub-prime loans is called a payday loan. There are even companies that offer payday loans through the internet. They’re extremely easy to get. Essentially, you will give the finance company a post-dated check for the amount of your paycheck, and the amount of money that they will give you in cash is a bit less than the amount of the check you give them. A week or two later, your paycheck comes and they cash the check.
The idea seems simple enough, but many people have accused payday lenders of preying on the lower class. When you look at the mathematics of payday lending, you can see why. Quite often the interest rates that they charge are anywhere from 400% to 800% on an annual basis. This is much more than any normal person would think is reasonable to pay. There was even a recent piece of legislation which prevents these companies from being near military bases, because so many servicemen fell into the payday loan trap. Their debt to income ratio would become so high that they were deemed a security risk because they would be more likely to accept a bribe!
We know that payday loans are not the best financial product out there, but are they ever a good idea? What if you need money to put gas in your car or to pay for groceries? After all, you have to eat and drive to work! Is it okay to get a pay day loan then? Many people would think of this as a justifiable situation, and this is how most payday loans begin.
When we look a little bit closer, we find out that payday loans are really never the solution, and here’s why. Let’s say that it’s the 5th of the month, and you had an automobile accident or some other such emergency and are now out of money until the 15th. You need to eat, so you go get a payday loan for the $1000 paycheck you would be getting on the 15th. You get $900 from the payday loan place on the 5th, but now that money has to last until the end of the month. So instead of having $1000 from the 15th to the 30th, you now have $900 from the 5th through the 30th. Chances are there’ll be a lot of month left when the money’s all gone. Of course you have to eat, so what do you do? You go get another payday loan for the 1st, and it becomes a vicious cycle.
There’s the fundamental problem with payday loans. You don’t need your paycheck sooner, you just need more money. A payday loan will never do this for you, in fact you will have less money with all of the fees that you are paying. There is no situation where a payday loan will solve your money problems, ever!
So what’s the alternative? It’s the 20th of the month, there’s mo money for food, and your car is running out of gas. You have hungry mouths to feed and you have to get to work, what do you do? There are always options. A pay day loan might seem like the easy way out, but this is not the case. Instead consider searching for some temporary extra income. You can do this by having a garage sale, selling some stuff, doing day-labor type work, temp work, and the like. If it comes down to it, ask your church for some help, or your family. Don’t borrow money; because the last thing you need right now is another loan. There are people out there who will help you. If you really need food, go to the food pantry.
There are options out there, but don’t let a payday loan even come onto the radar of consideration. They won’t solve your short-term financial problems, and will only put you deeper into debt and give you another payment to worry about.