NBC News recently reported on a 66-year-old Boise man, Raymond Chaney, who lives off of his social security. Back in November Chaney’s car broke down and he didn’t have the $400 to get it fixed.
Needing his car repaired and his next social security check nearly a month away, Raymond borrowed the money from an internet payday lender. When the loan came due in 14 days, he couldn’t pay so he extended the loan. These extensions continued for months and Chaney’s finances spiraled out of control.
Since these online loan providers require that you make an automatic payment from your checking account, Chaney started racking up the overdraft charges, and bounced other checks including his rent payment. Raymond was subsequently kicked out of his apartment for not paying.
Payday loans in my opinion are worse than the “Jimmy the Hook” 1920’s Shylocks you read about in gangster books. Twelve million Americans take out payday loans each year when they find themselves in difficult financial situations. Not knowing what to do, when faced with the immediate need for cash, payday loan borrowers often contemplate formal credit and informal options, including reducing their expenses, trying to borrow from family or friends, putting off the payment of bills, or selling or pawning items of value.
The typical payday loan borrower would likely describe themselves as trying to keep up with their bills, often by using noncredit alternatives rather than exploring credit options. These people are familiar with debt and don’t want to take on any more. In deciding whether to borrow from a payday lender, more than 3 in 4 borrowers rely on the lenders to provide them accurate information about the loan.
Most lenders describe their loans as a “safe and sensible financial choice,” and “the best alternative to meet their current needs” These payday loan companies promise fast cash relief for a “one-time fixed fee.” The loan has a repayment period of two-weeks and the stated two-week duration appeals to the borrower’s desire for a quick blast of cash as well as the conflicting desire not to be in ongoing debt. In reality, both desires cannot be met.
But a payday loan’s unrealistically short repayment period suggests otherwise. People in difficult situations are led to believe that the loan can solve their problem at an affordable fixed cost. This causes the borrower to in stop seeking alternative methods, asking for help, cutting back further on spending.
The ultimate cost and length of these loans are highly unpredictable and turn out nothing like their “two week” advertising claims. Average borrowers end up indebted for five months or more, paying $520 in finance charges for loans averaging $375, mainly because they see their only options as making a big lump-sum payment, paying the debt off, which they cannot afford, or paying the fees to continuously pay back afford but which does not reduce what they owe. Once they have pulled the trigger and taken out one of these payday loans, they are usually unable to do either. The consumers who make it through an experience with payday loan find themselves both grateful that they were able to get out of the cash bind they were in but on the other hand feel that they have been take-advantage of by the payday lenders.
Forget the 600% APR that these types of loans can produce, the biggest problem is that more times than not, the borrower finds themselves unable to pay off the loan in two weeks, and like Mr. Chaney, tries to pay the “fee” to extend the loan and eventually it all comes crashing down.
If you find yourself in financial distress with overwhelming debt, before you do something drastic like taking out a payday loan, seek the advice of a professional.
The professionals at DebtHelper.com can explain the benefits of a debt management program and provide you with a fresh start.
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