Getting a Payday Loan

[bjl584]

It can make financial sense. Let's say I am 100$ short of having my rent money. My apartment charges a $150 late fee if I pay after the 5th, but I don't get paid again till the 8th. It costs me $15 to borrow $100 from a payday loan place. That is only 10% of what I'd have to pay otherwise.

Or what if I get strep throat and don't have $30 for a doctor copay or $10 for the antibiotics. If I wait four days to get my next paycheck, that is four more days I have to miss work and I do not get sick pay. So if I make $50 a day I am going to be 200$ poorer. Or I can pay $7.50 to borrow $50 and recover four days sooner. Not to mention the pain and misery I've saved myself.

These are the kinds of decisions people have to make when they are constantly living hand to mouth.

While all that is true, the vast majority of people that are likely to get a payday loan are probably not that savvy at math or at cause and effect relationships. You are definitely in the minority if this was your thought process when you were getting these types of loans.

[disneysteve]

It can make financial sense. Let's say I am 100$ short of having my rent money. My apartment charges a $150 late fee if I pay after the 5th, but I don't get paid again till the 8th. It costs me $15 to borrow $100 from a payday loan place. That is only 10% of what I'd have to pay otherwise.

Or what if I get strep throat and don't have $30 for a doctor copay or $10 for the antibiotics. If I wait four days to get my next paycheck, that is four more days I have to miss work and I do not get sick pay. So if I make $50 a day I am going to be 200$ poorer. Or I can pay $7.50 to borrow $50 and recover four days sooner. Not to mention the pain and misery I've saved myself.

These are the kinds of decisions people have to make when they are constantly living hand to mouth.

hamchan, I have to say this is the single most intelligent thing I have ever read regarding payday loans. If you can somehow manage to crunch the numbers like this AND have the discipine to repay the loan promptly, I now see how it could actually work to your advantage in certain situations.

Obviously, the problem, as Brian alluded to, is that most people aren't doing what you describe. They're ending up in an endless cycle of payday loans to make ends meet.

I guess just like with many financial instruments, like credit cards, it is possible to use them to your benefit. You just have to be smart, careful, and diligent so that you don't get screwed.

[hamchan]

At the time I was occasionally using payday loans I was a single parent with shared physical custody, in a high cost of living area, and I worked at a job where my pay was 100% commissions and tips. After deductions for health insurance and taxes that meant I might make anywhere from $500 to $1200 in a two week period. That made it very hard to budget and plan, because there was no way for me to live off of $1000 a month. I needed around $1500 to meet basic expenses. If a slow period went on for a couple of months at a time then things got very very tight. Any savings I had managed to accrue got used up. But I knew when our busy times were and I knew that eventually I'd be getting a few larger checks which would allow me to catch up. Payday loans give you up to 45 days to repay without charging any more interest, so with no other credit available to me the two or three payday loans I got each year allowed me to squeak by.

You are probably right that a lot of people who use payday loans don't really crunch the numbers and don't have a good understanding of what they are getting into. Some of the regulations have helped with that. I know there is now a limit to the number of payday loans you can take out per year, and they also extended the amount of time you have to pay it. It used to be three weeks and was changed to 45 days.

[creditcardfree]

Maybe if we (the government and society in general) keep payday loans, we should do a better job at counseling those using the services. Disclosing of reason for money, the plan they have to pay it back, disclose anything that could get in the way of repayment, the math for understanding how this current need came to be. No one should really be allowed to keep racking up high fees and debt over and over again! I personally would be fine if they were outlawed or limited in a way like we limit buying certain over the counter drugs...pseudoephedrine.

[creditcardfree]

I know there is now a limit to the number of payday loans you can take out per year, and they also extended the amount of time you have to pay it. It used to be three weeks and was changed to 45 days.

Is this limited by state or federal?

[KTP]

The interest/fee isn't 200 to 300% per week, rather I think it is more like 200% per year compounded. But people don't hold it for a year.

It is similar to when you have a short term gain in the market. If you buy a stock on Monday and sell it on Tuesday for a 5% gain, you actually have an annualized gain of 1.05^365 - 1 or about 54,000,000%. Hey that actually sounds pretty good! I only need to earn 5% a day on a $100 stock and I am richer than Bill Gates!

Not defending payday loans but pointing out the way the "high" interest rates are calculated.

[hamchan]

Is this limited by state or federal?

I think it's federal, but not positive. I just remember when the laws changed they explained the changes to me because I had gotten loans prior to that.

[bigdaddybus]

Great points hamchan.

When I was in the military(94-97) payday loan places were a big cause for concern for my battalions leadership.
What I always found interesting is that low ranking soldiers in financial trouble could face a demotion as a reprimand.
Your not paying your bills soldier, let's teach you a lesson by taking more money from you!

[disneysteve]

The interest/fee isn't 200 to 300% per week, rather I think it is more like 200% per year compounded. But people don't hold it for a year.

True. I hope I didn't imply otherwise.

The point is the rate is extreme, even if you only hold the loan for 30 days. But that's how they snag people. "Borrow $100 for only $10." Sounds cheap. Sounds like a 10% fee. But it isn't.

[johnt78]

Payday loans are short term loans that are often used to get through a rough spot. Unfortunately, there are very few situations in which these loans actually end up being helpful. Before you use one, make sure you understand the costs and risks. This page gives you a quick overview of how payday loans work, and ideas on how to avoid them.