Need quick cash? Don’t use payday loans, advises guest writer Marc Hedlund. Payday loans offer a quick path to debt.
The New York Times published an article last week about the growth of “payday loan” stores — places that give a short-term, high-interest loan as an advance against your next paycheck. The article revealed some bleak results for people who use these services:
Mr. Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to Gallup [New Mexico] and visits 16 storefront money-lending shops. Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”
The article notes that these loans are effectively banned in 11 states, but are legal and growing quickly in the other 39. There are some terrible anecdotes included about the effects of these loans:
“Payday lending just keeps growing, and it just keeps sucking our community dry,” said Ralph Richards, a co-owner of Earl’s, Gallup’s largest and busiest restaurant.
Mr. Richards sees the impact among his 120 employees, mainly Navajo, some of whom become trapped by payday loans they cannot repay and, he said, “develop a sense of hopelessness.”
In one indication of how common the problems are, his restaurant alone gets 10 to 15 calls each day from payday lenders trying to collect overdue fees from his workers, Mr. Richards said. At any one time, under court order, he must garnish the wages of about a dozen of his workers to repay such lenders.
Reading this hit home for me. While I’ve never gone to any of the storefront places that the article discusses, for a couple of years, I was a very frequent user of a similar service offered through Wells Fargo ATMs. Called “Direct Deposit Advance,” the Wells program offered you up to $200 advance on your next paycheck, as long as you had direct deposit set up on your account. I think the fees for a $200 advance were $20. My situation was nowhere as bleak as the stories in the article, but I had exactly the same bad cycle: every paycheck, the first thing I would do is go to the ATM and take an advance on the next paycheck. After this had gone on for a while, I realized that I had been doing it every paycheck for more than a year.
So what was the result for me, in a much less desperate circumstance? Over the course of a year, I took 26 advances at a cost of $20 each — a total of $520. What did I get for that? For one paycheck, I had access to $200 more. That’s it — after that, each advance only served to pay off the previous advance. I paid $520 paid to get a short-term loan of $200.
I was fortunate that I had a good job, and even though I had accumulated a lot of expenses, I was able to break the cycle and get out of the $200 advance trap. The worst part was that the habit was so easy to perpetuate — just drop by the ATM, and the cycle continues. I didn’t even realize how long it had gone on until I added everything up for the year (using Quicken, which I had let lapse during that year) and saw the same transaction every two weeks. I was able to cut back on a few expenses and get out of the trap.
(Later, though, I got a “short-term loan offer” from Wells Fargo — a check for $1,500 that just showed up in the mail. I cashed it, and then spent months repaying it. The same problem in a different form.)
The people in the Times’ article have it much worse — their interest rates are higher, they have multiple loans to repay, and their jobs are not going to allow them to break out of the cycle anywhere near as easily. For me, I just had to decide to get out of it and work at it for a few weeks; for them, it will be months or years of effort. As Ralph Richards says in the quote above, the effects of this are not limited to the people who take the loans, but of course also to their families, their employers, their friends, and their community. Who benefits from that?
If you see a payday loan store moving into your community, my advice is to fight it. I see these businesses as predatory, and nothing more than a fancy neon sign on top of old-fashioned schemes for usury. But don’t just stop at worrying about payday loan storefronts — they’re the worst, but the credit industry offers these “products” in many forms, and you can easily get caught in renewing a short-term loan at great expense.
The basic lesson for personal finance is the same you’ll have heard many times, but it always bears repeating: If it seems like you’re getting easy money, watch out! Easy money is the hardest kind there is.