A payday loan may seem like a good idea when you’re strapped for cash. On the surface, they look harmless. They’re quick and easy to get. But, they can do a lot more harm than good.
Here’s what you need to know about payday loans to help you make informed financial decisions.
What Are Payday Loans?
According to the Consumer Financial Protection Bureau, a payday loan is “a short-term, high-cost loan, usually, for $500 or less, that is typically due on your next payday.” Payday loans may be available through vendors or online, depending on state law.
Common features of payday loans include:
- Small amount of money borrowed
- No paperwork, credit check, or waiting
- Extremely high-interest rates
- Repayment within 14-30 days
Payday loans may seem like a good idea on the surface, but they are not designed to help you.
How Payday Loans Works
Let’s say you have bad credit, no savings, and your car breaks down. The mechanic says it will cost $500 to fix your car. You don’t have $500 and need your car to get to work. So, you decide to take out a payday loan for $500. The lender charges $75 interest for $500 loans. You take out the loan on June 15 and the lender requires repayment within two weeks. The lender has you write a check for $575, the amount of the loan plus interest, that’s post-dated June 30. On June 30, the lender will cash the check, whether you have sufficient funds in your account or not. This could make your financial situation worse.
What’s more, if you annualize the $75 interest you paid for two weeks, it comes out to a nearly 300% interest rate. That’s on the low end. Payday lenders usually charge much more, sometimes up to 500%. They know you most likely won’t have $575 in two weeks and will need to take out another loan to cover the one you already have.
Taking out payday loans can get you stuck in an ongoing cycle that never ends.
Payday Loans in Georgia
Georgia prohibited short-term lending over 100 years ago. As a result, predatory storefront payday lenders are not legal in the State of Georgia. However, they are legal in 39 other states and many lenders will try to offer payday loans online. If this happens, report it immediately to your local District Attorney.
How to Avoid Payday Loans
The best way to avoid ever needing a payday loan is to take control of your finances. Here’s how:
1. Create a long-term financial plan.
A long-term financial plan is a tool that helps you see the big picture and set short- and long-term financial goals. It takes a holistic view of your financial situation and goals so you can better manage your money. It’s a roadmap that helps you realize your financial goals.
2. Set a monthly budget.
A monthly budget is how you make your long-term financial plan happen. It’s a tool that shows how much money you bring in, how much money goes out, and how much money is left to start putting towards your goals each month. It helps you keep tabs on your finances.
3. Pay down debt.
Paying down debt helps you save money on interest in that debt. It ultimately gives you more money to put towards your financial goals.
4. Make a meal plan to save money.
Meal planning is a great way to budget your food expenses because you know exactly what you need and how much you will spend. There are no surprises at the grocery store.
5. Increase your savings.
Most experts recommend having at least three months’ worth of expenses in an emergency savings fund. This is money that you set aside in case something unexpected happens like your car breaks down and will cost $500 to fix. Increasing your savings gives you a financial cushion so you don’t need to borrow other people’s money.
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If you’re experiencing financial hardship, please visit this resource list our team put together.