Would you want a credit card that charged 400% interest or more? A mortgage that more than quadrupled the cost of your house?
Most consumers would instantly answer “no.” Yet, about 12 million Americans use payday loans payday loans with often triple-digit interest rates every year. Yes, you read that right – rates typically range from 300% to 900%. In Ohio, where payday loans are legal, the average APR of a payday loan is 124%.
These short-term loans soared in popularity during the 2008 recession, leading news networks to report that the U.S. had more payday lenders (about 18,000) than McDonald’s franchises. The Consumer Financial Protection Bureau has been working to toughen regulations to protect borrowers. Many state governments, including Ohio’s, have also cracked down on some of the more controversial practices of payday lenders.
The bottom line? Consumer advocates agree that payday loans provide poor value. If you really need money, the smarter choice is to work with your local bank to address your financial problems. At Southern Hills Community Bank, we offer a wide range of personal loan options, as well as financial counseling services so that you can stay away from payday loans.
What is a Payday Loan?
A payday loan is a short-term loan usually offered in amounts ranging from $100 to $1,500 or more. In Ohio, borrowers can take out up to $1,000 in payday loan, with a loan term of 90 days to 1 year. Lenders argue that these loans provide financial lifelines to those facing financial emergencies.
Also known as cash-advance or check-advance loans, they’re usually referred to as payday loans because the payment deadline is set for the borrower’s next payday. Given such a brief repayment period, it’s no surprise that more than 20% of borrowers nationwide default on these loans.
Payday Loan Fees
Most payday lenders charge fees ranging from $10 to $30 on average for each $100 borrowed. For example, a consumer taking out $1,000 loan might be required to pay back the $1,000 plus $300 in interest, all within two weeks. This works out to an annual percentage rate (APR) of about 400%. In contrast, most credit cards carry interest rates of well under 30%.
So why do consumers want loans with such lousy terms? Some have poor credit histories and feel they can’t get more conventional loans. Others like the fast, few-questions-asked application process. But the truth is, these loans often cause more problems than they solve.
When consumers can’t afford to repay their initial loan on time, they roll it over into a second loan. And often, into a third loan. And things snowball from there. A study by DebtHammer found that, on average, 80% of payday borrowers end up getting 11 or more payday loans in a row, paying extra fees and interest on the same debt with each new loan.
Alternatives to Payday Loans
If you are in a tough financial position, consider these alternatives:
- Take money from savings: It’s great to prepare for the future. But if you have a crisis now, it’s better to tap into savings than be saddled with a high-interest loan. Once you’ve weathered the financial storm, start socking away money again. Southern Hills Community Bank has several types of savings accounts that can help put you back on sound financial footing.
- Use your credit card: Yes, you should try to avoid maxing out your credit cards. But in a financial crisis, consider using them to fund some short-term expenses. After all, paying 25% interest on your card balance is better than paying 400% on a loan. Southern Hills Community Bank offers several credit cards, including one that earns 1% cash back on everything you buy.
- Take out a traditional loan: If you have a job that provides a steady stream of income, you can talk to our lending team about your loan options. Homeowners might be able to get a home equity loan. Others may benefit with a personal loan or debt consolidation loan.
- Contact creditors: If you can’t pay your bills, many creditors will work with you to reduce the amount due or give you more time to pay. It’s much better to negotiate than to skip payments. That can hurt your credit score and affect your future borrowing ability.
- Talk to your employer: Ask your boss or HR department if they can give you an advance on your pay, let you work overtime or adjust your income tax withholdings. All these alternatives are better than a payday loan because there are no interest payments involved.
- Work with a credit counselor: Counselors can help you figure out a repayment plan, negotiate with creditors, and work on long-term budgeting and savings plans that will prevent future crises. For more information, contact Southern Hills Community Bank about the services we provide, or contact the National Foundation for Credit Counseling for their assistance.
To anyone facing a financial crisis, a short-term payday loan might indeed sound like a lifeline. However, the reality is that these loans can lead to a long-term debt spiral that just makes things worse. If you’re facing financial difficulty, please contact Southern Hills Community Bank. We’d be happy to work with you to help figure out your options.
