- [Narrator] Within a week of being paid,
all the money is gone
and you still have bills to pay.
You've scraped and pinched everywhere you can,
but there's just not enough to cover what you need.
- With nothing in savings,
no credit cards to utilize, and poor credit,
what alternative do you have?
Should you visit the dreaded Payday lender?
(light music)
- Payday loans, also called cash advance loans,
are advertised as a short-term relief
when you're in a financial bind.
they are meant to be for small amounts, usually up to $500,
which the consumer intends to repay
with their next paycheck.
- To some, it may seem enticing to go this route.
For starters, the application process is pretty simple.
Only requiring an Idaho, proof of income,
and a bank account.
Once the process is finalized,
you can get your money the same day.
- Sounds attractive, but to see the real cost
we'll have to (drum roll)
- [Both] run the numbers.
- Paula has a full-time job as a server in a restaurant,
but a bout of COVID forced her to miss several shifts.
Coupled with the recent increase in gas prices,
she's found she doesn't have enough for this month's rent.
With the moratorium on eviction's lapsed in her state,
she doesn't wanna do anything to aggravate the landlord.
So, she considers taking out a Payday loan.
It's just $500, she thinks,
I should be able to pay that off.
She completes the application online,
presents the required documents,
and the funds are deposited into her bank account
within 24 hours.
Whew, crisis averted.
- Or has it just begun?
Obtaining a Payday loan is easy,
but the interest rates are high, really high,
like Woody Harrelson high.
Paula's lender charges $20
for every hundred dollars borrowed over a 14-day term.
That's an annual percentage rate of around 500%
- After another lackluster couple of weeks at work,
Paula unfortunately only has $150 left over,
far from the $600 she now owes.
When the lender tries to automatically deduct it
from her account, it triggers a $35 overdraft fee
from her bank.
If she pays the $100 of interest on the loan,
the lender will graciously allow her to roll over the debt
tor another two weeks.
Paula has already paid $135 in fees and interest
and she's not one inch closer to paying back the loan.
- It's estimated by the Consumer Financial Protection Bureau
that 80% of Payday borrowers fail to pay back the loan
in full within the 14-day term.
And that the average loan
of $375 takes an average of five months to pay back.
By which time the total cost is around $1,000.
That's not including any late fees or overdraft fees
their banks or credit unions may have charged them.
- Payday loans are considered predatory
for two main reasons.
Their high interest rates and the fact
that they do not practice underwriting.
Underwriting is the process
of investigating a prospective borrowers finances
to verify whether they will be able to pay back the loan.
If you've ever applied
for a mortgage or a credit card, you've gone through it.
But many Payday lenders don't bother with underwriting.
It's almost as if they want customers
who won't be able to pay back the loan
so that they can trap them
in a never ending nightmare of fees and interest.
- In 2017, the CFPB issued a mandatory underwriting rule
that would compel Payday lenders to check
whether a borrower could handle a loan before issuing it.
However, the rule was revoked in 2020
under the Trump administration.
- After five months, Paula has paid close to $1,000
in interest and fees without even making a dent
in the original $500 loan.
She's starting to realize that this short-term solution
has become a long-term problem.
So, what can she do?
Assuming she's exhausted her options
for scrounging up extra cash,
she could borrow more money like taking out a personal loan
from her credit union or paying off the loan
with a credit card.
But most people who resort to Payday loans do so
because they can't qualify for other types
of credit or have already maxed out their cards.
- Paula considers defaulting on the loan,
after all, her credit score is already in the dumps.
But if she thinks the lender will let her off the hook,
she's dead wrong.
Payday lenders will refer delinquent borrowers
to collection agencies and even take them
to court over sums as small as a few hundred dollars.
They can put a lien on your house or garnish your wages.
- There is of course the B word, bankruptcy,
but before she considers that option,
Paula should contact the lender directly
and try to negotiate a settlement.
Lenders would almost always rather get the money directly
from the borrower than sell the debt
to a collections agency.
And they're often willing to settle
for as little as half the full amount,
especially if Paula mentions
that she's considering declaring bankruptcy.
In which case they'd get nothing.
- Even if Paula makes it out of this jam,
she'll undoubtedly wish that she'd never gotten
into it in the first place.
Payday loans are almost always a bad idea.
If you need cash fast, sell some possessions,
pick up extra work, borrow from friends and family,
even take out a new credit card.
Almost anything else you can do,
that's legal is preferable to a Payday loan.
Of course, keeping a strict budget
and having an emergency fund can protect you
from even being in such a vulnerable position.
- Listen, we may all find ourselves
in a financial bind at some point
and borrowing money can be a lifesaver
when unexpected crises arrive.
- But you have to make sure that what you're swimming
toward is an actual lifesaver and not a shark in disguise.
- [Both] And that's our "Two Cents."
- Before you go, we want you to know
about an incredibly important new digital series
from PBS, "Facing Suicide" shines a light
on the power of friends
and family during and after a mental health crisis.
- Hear from suicide attempt survivors, their journeys,
and explore the healing found
in sharing your story with a group of peers.
Click the link in our description to watch it now
and we hope it can inspire you or someone you know.
- [Narrator] Thanks to our patrons
for keeping "Two Cents" financially healthy.
Click the link in the description to become
a "Two Cents" patron.
(light music)