Do Payday loans ever make Financial Sense?
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Do Payday loans ever make Financial Sense?
The process of taking a payday loan is often more as a way of treating the symptom than treating the condition. Many people have options.
By Hal M. Bundrick, CFP(r) Senior Writer | Personal Finance as well as financial planning and investment Hal M. Bundrick is a personal finance writer and a NerdWallet expert in financial matters. He is certified as a financial planner, and an experienced financial consultant as well as a senior investment specialist for Wall Street firms. Hal was a consultant to families, business owners trusts, nonprofits, and trusts as well as managed group employee retirement plans in the South and Midwest. Hal is now working to make financial matters understandable and uncomplicated.
Jul 17 14th, 2014
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There is ever a reason to take advantage of an payday loan? Living paycheck-to-paycheck can wear you down. In the end, spending every penny of your income leaves no space for error. While this type of behavior can be thought of as a hallmark of the poor, studies have revealed that a few “hand-to-mouth” household members are relatively wealthy. However, the majority of their assets can’t be readily or easily converted into cash, such as a house or retirement account. These folks may find themselves confronted with a pressing requirement for cash and have not knowing how to access the money quickly.
Short-term high-interest, short-term loans that are typically secured by a borrower’s post-dated check — can be an attractive alternative. Although these loans are especially harmful to those with small financial resources, there may be instances when a payday lender seems to make sense. Yet that solution is often as if treating the symptom than the cause.
Who can take out payday loans?
Although living on the edge is a financial condition that plagues Americans across the spectrum of wealth The U.S. Consumer Financial Protection Bureau (CFPB) in Washington declares that the median earnings of an payday loan borrower is less than $23,000. by the Center for Responsible Lending (CRL) found that the most common borrower is white, female and from 25 to 44 years old.
But five socio-economic groups had the “highest chances” of taking out an payday loan: individuals without a college degree, African Americans, people who earn less than $40,000 per year, and those separated or divorced According to CRL which is headquartered in Durham, N.C.
It’s easy to find, but is it worth it?
If a cash-flow crisis arises, payday loans — similar to easy to obtain. The borrower typically only has to present a valid identification document along with proof of income as well as a personal checking account in order to be eligible. The lender typically expects either the post-dated check or access to the borrower’s bank account to ensure repayment. Credit scores aren’t examined and the capacity of the applicant to pay back the loan considering other expenses and debts isn’t taken into consideration.
In exchange for quick access to cash that is needed charges can be hefty — ranging from $10-$20 per $100 borrowed for two weeks. The actual annual percentage rates (APR) is typically close to 400% and sometimes far greater. This has resulted in outright bans of payday lending or limits on payday loans in 22 states including curbs on how many loans a consumer can get in a single year.
The majority of borrowers don’t have the means to repay the loan and to pay for their other regular expenses. A series of short-term high-cost loans typically result in such cases, entrapping many at a expense of over a hundred dollars cumulative fees according to the CFPB says. The majority of people who used payday lenders usually did so repeatedly over a 12-month period according to a study released last year. Nearly half of the borrowers used at least 10 shorter-term loans within a calendar year.
Can payday loans be a low-cost option?
However, when faced with a financial emergency, what’s one to do? It’s surprising, Moebs Services, an economic research firm in Lake Bluff, Ill. It claims that payday loans can be a cost-effective option, when compared to alternatives such as overdrawing a checking account.
Banks are raking in increasing overdraft fees, reflecting the financial pressure hand-to-mouth households have to endure in order to survive. That revenue stream was on track to rise 1.6% to almost $32 billion last year, Moebs estimates.
Using a $100 example and comparing the fees of payday lenders with the typical bank fees , Moebs breaks down the figures:
Payday loans for $18
Credit unions, $28
Banks, thrifts, and $30
Wall Street banks, $35
“If price is a concern for the money need, then payday lenders provide the lowest price they can offer,” Moebs concludes. The consumer agency claims that the majority of borrowers — almost 10 million Americans — roll over the loans every so often, and, more often than not often, several times throughout the year.
Solutions to payday loans
In the event of an emergency cash requirement and need to pay for it immediately, a payday loan may be a suitable solution in the short term. However there is a problem. The Pew Charitable Trusts in Philadelphia found that more than two-thirds (69%) of payday loans are taken out for everyday recurring expenses -however, only 16% of them were drawn for unexpected emergencies. This highlights the root of the problem: the family that lives on their own who lives beyond their means, is digging itself deeper into debt when it makes use of the services of a payday loan.
When asked what they’d do if they were not able to access payday loans, 81% said they would cut back on expenses, according to an 2011 Pew survey. For poor and affluent households alike who live pay-to-pay — cutting down on spending is one of the ways to end the cycle of accumulating debt.
Take the test below to discover your other alternatives to payday loans.
The author’s bio: Hal Bundrick is a personal finance writer as well as an expert on NerdWallet in financial matters. He is a certified financial planner, as well as a an ex-financial advisor.
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