Payday Loans and the Dangers of Borrowing Money Quickly
American voters have spoken – and not just for the next president. They also support cracking down on what some see as predatory lending, especially in the form of payday loans. In the November election, South Dakotans voted to cap interest rates on short-term loans at 35%. With this vote, South Dakota joins 18 other states and the District of Columbia in capping the amount of interest lenders can charge on payday loans.
Payday loans are small loans that allow you to borrow against a future salary. This option comes at a steep price, however, because the interest rates associated with these loans – partly because many people are unable to repay them on time – are incredibly high. Payday loans are prevalent in low-income communities, and these lenders have been criticized for their treatment of low-income borrowers. These borrowers may need extra cash to meet their monthly expenses, but at the same time are unable to repay the payday loans on time, putting them in an increasingly important situation. debt with payday lenders.
How it works
The minimum age to borrow a payday loan is 18 years old. But just because teens can borrow money this way doesn’t mean they should rush into using this type of loan without understanding the financial ramifications. In September 2015, a British teenager made headlines when he took his own life after losing a large chunk of his bank account to a payday lender known as Wonga. This and other less dramatic cases have heightened the scrutiny of payday loans industry.
While a study by Pew Charitable Trusts found that 25-44 year olds make up the majority of payday loan borrowers, 5% of 18-24 year olds have borrowed money this way. When they do, they can hurt their financial future by getting trapped in a cycle of debt because they don’t understand how these loans work or underestimate their ability to repay them.
Payday loan amounts typically range from $100 to $500, with the average loan around $375, according to Pew Charitable Trusts. Borrowers pay an average fee of $55 per two weeks, and the loan must be repaid based on your payday.
If you can’t repay the loan at the end of the two weeks, payday lenders will usually turn it into a new loan. As a result, the average payday loan borrower is in debt for five months of the year. Repeated renewal of loans could lead to annual interest rates of over 300%. Compare that to a credit map interest rate by 15%.
“When someone takes out a payday loan, most of the time they’re not in the best financial position to begin with,” says Matthew Divine, managing partner at Realpdlhelp.com, which provides debt consolidation services from payday loan. “Sometimes people are just naive and someone offers $500, and they’ve never had a loan before. Sometimes people just do it because they need the money or think they need it.
Divine business works with borrowers who have difficulty repaying multiple loans. “We organize the debt for them…then we send a letter to the lender and tell them that all communications must come through to us.”
Due to high fees, some young people are looking for alternatives to traditional payday loans when they need money fast. Flint Yu, 18, a senior at Hightower High School in Houston, avoids using payday lenders to get advances on his paychecks, which he says he needs to transact in his brokerage account. “I’d like to try to avoid those because I’ve heard those interest rates are crazy,” he notes.
Instead, Yu uses Activehours, a free service application which refers to the timesheets of his part-time job