The Trouble with Payday and High-Interest Loans

Payday loans seem like an easy fix when you’re short on cash. Who hasn’t been tempted by the promise of fast cash to get you through a rough patch? But beware – these loans can lead to a cycle of debt that’s nearly impossible to escape. Let me break it down for you…

What is a Payday Loan?

A payday loan is a short-term, high-interest loan, usually $500 or less[1]. The idea is that you borrow against your next paycheck to tide you over until payday. But here’s the catch – you have to pay back the full loan amount plus fees in just two to four weeks[4]. That’s barely enough time for most people to get back on their feet financially.

So when your loan comes due, you have two choices:

• Pay it off in full, which is tough for most borrowers to do
• Pay just the fees to roll it over into a new loan

Almost 80% of people can’t pay back the loan in full after two weeks[5]. So they get stuck rolling it over again and again, paying crazy fees each time.

The Fees Are Killer

Payday lenders charge $15-$20 in fees per $100 borrowed[5]. That may not sound so bad…until you do the math. Calculated as an Annual Percentage Rate (APR) – you know, like they do for credit cards – payday loan fees equal an APR between 391-521% [5]!

That’s compared to, say, 28% for a typical credit card. No wonder payday loans get people into trouble! Let’s look at an example:

Sarah takes out a $375 payday loan with a fee of $56.25. That’s an APR of over 400%! If Sarah can’t repay it in two weeks, she’ll owe the lender $431.25. Yikes. If she “rolls it over” into a new loan, she’ll owe $495.94. In just one month, her $375 loan became almost $500[5]. Crazy!

It’s a Debt Trap!

So why do people get stuck rolling over payday loans? Well, if you couldn’t afford to pay back $375 in two weeks, how will you pay back $500 in another two weeks? You probably won’t. 80% of people don’t[5]. They get caught in a debt trap, paying fees every two weeks just to renew the loans.

This cycle often continues for months or even years. People get so desperate they take out more payday loans to try to pay off the first ones. One woman paid $2,500 in fees on $1,000 in loans[3]. Another paid $900 in fees for a $250 loan[3]. Their budgets get consumed by fees, leaving little for necessities. It’s heartbreaking.

There Are Better Options

Please don’t get stuck in the payday loan debt trap! Consider these alternatives first:

• Ask your employer for an advance on your paycheck
• Borrow from friends or family
• Apply for a traditional personal loan from your bank or credit union
• Use a credit card (but pay it off quickly!)
• Sell unused items online or at a pawn shop

Traditional loans have much lower rates – think 30% APR vs 400% for payday loans. But be careful not to borrow more than you can repay[6].

Get Help Escaping the Trap

If you’re already caught in the payday loan cycle, don’t despair. Reach out to a nonprofit credit counseling agency like InCharge Debt Solutions[5]. Their experts can help you manage the debt, negotiate with lenders, and find ways out. You can take back control!

And be sure to call your lawmakers to support legislation capping payday loan rates and fees. Some states ban payday lending or limit rates to 36% APR[5]. We need better laws to protect vulnerable families everywhere.

The payday loan debt trap is real. Please borrow responsibly and reach out for help if you need it. There is hope!