I’ve noticed a trend when working with clients who utilize payday loans. The names of the companies are fun and friendly. The logos above are for Dave, Albert, Brigit, Gerald, Klover and Cleo. It's not a big deal if you borrow money from a friend, right?
Payday loans and title loans are predatory. I don't care what cute mascot they use, it's making the consequences of these loans feel less impactful. When you search "loan" in the app store, each of the apps has bright and fun images. Big flashy "No fees!" and "Instant money!" entice borrowers. How bad could it be? It's BAD.
Real example: I had a client with several of these loans and she didn't know how much interest was being charged. What started as an innocent choice to get some extra cash cost her an insane amount of interest. Her payday loans were charging anywhere from 120% to a whopping 774% (you read that right). A $350 loan at 774% interest paid over 7 months cost her a total of $1,739. That's $1,389 in interest alone.
Another example: A second client snagged a $350 payday loan at 682% interest. The repayment period was much shorter, only 3 months. The finance charge was $586. It was a grand total of $936.62 just to borrow that measly $350.
Title Loans: Another client secured a title loan to pay some crucial bills. He knew this wasn't a long-term solution, but had no idea it was this bad. He borrowed $2,500 against his car title at an interest rate of 311%. The term was six months. The interest charge was $3,800, with a total cost of $6,300! Not only did the monthly payments cost him over $600, there was a balloon payment at the end. Guess how much that final payment was? Over $3,000. Due at once. That's more than he got to begin with. I wish I made this up.
Once these clients were made aware of their insane finance charges, they were floored. Both found ways to pay these off and avoid them at all costs going forward.
Did you know it's illegal for creditors to grant payday loans or title loans to military members or their families? If the government knows its dangerous, why are they so prevalent? It's well known that these creditors congregate in areas of lower socioeconomic status. Now, they've infiltrated the online space. There aren't the barriers of driving, walking into a location and speaking to a person to get this fast cash.
People don't turn to these loans because they're lazy, impulsive or ignorant. You don't even have to be on the brink of homelessness or working a minimum wage job to be targeted by these companies. They're lucrative for people in a pinch and need help to make it to payday (hence the name). These creditors thrive around the holidays when those shopping triggers hit consumers. Some of these loans require payment in 2 weeks when your next payday hits. As you can imagine, it's easy to get caught up in a nasty cycle of dependency. Without major changes in money management and often some help, people can't break free.
An educated borrower is a safe borrower. When getting a loan for anything, take all of the information. This includes:
Total amount borrowed and how it's paid to you
Interest rate (usually expressed as an annual percentage, APR)
Term of the loan (amount of time to pay it back)
If there's a prepayment penalty (punishment for the company missing out on interest)
If there's a balloon payment at the end of the term
If a lender doesn't have this information for you, RUN. Always get several estimates, even if you're just comparing a personal or auto loan. Show it to a trusted friend for a second opinion. Make sure you know exactly what you're signing up for. Stay safe out there!