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The Permanent Damage of Payday Loans

Allison London

Payday lending is TOXIC. It damages even those with good intentions of repaying their debt. Every year, roughly 12 million people in the U.S. borrow a total of $50 billion, spending some $7 billion on just interest and fees, according to The Pew Charitable Trusts. An estimated 16,000 payday loan stores are spread across the U.S., with hundreds upon hundreds more lenders operating online.

Payday loans and so-called auto title loans, which are secured by a borrower’s vehicle, are marketed as being helpful for financial emergencies. Many tout their payday loans as a way to “bridge the gap” after a car accident, illness or other unexpected expenses that have left people temporarily low on funds.

In fact, however, the typical borrower uses payday loans for rent, utilities and other recurring expenses. And while these loans are usually due in two weeks, the sky-high interest rates and heavy fees make repaying them on time all but impossible. So borrowers are forced to take out a subsequent loan, hence igniting the vicious, unending cycle of debt.

The biggest problem with payday loans is they’re NOT AFFORDABLE. They’re really not even loans at all — they’re a sneaky way of sucking needy people into the black abyss of debt. All payday loans are cost prohibitive. The average annual percentage rate, or APR, on the loans is 391 percent, which comes to $15 for every $100 borrowed. Sadly, lenders in states without a rate cap often charge far more.

Lenders’ origination fees and other charges further escalate payday loan costs. The average fee for storefront payday loans amounts to $55 every two weeks. That means borrowers typically pay more than $430 the next time their paycheck arrives, often leaving them struggling to cover their living expenses until the following payday.

As a result of these costs, instead of quickly borrowing and repaying the money, most payday loan users end up in debt for months at a time, repeatedly taking out loans as they run low on cash.

Another major problem is that payday firms don’t issue loans based on a person’s income or ability to repay the money, like an ordinary bank loan. As a result, loans typically end up consuming well over a third of borrowers’ total income. Unfortunately, lenders in many states can directly collect payment for a loan from a person’s bank account. The results are predictable and include hefty bank penalties for overdrafts and insufficient funds when payday lenders repeatedly try to debit a person’s account to collect payment.

This dangerous practice of debiting your account whenever these, ‘loan sharks’ feel like it, leads to more stress. What’s more, your overdrawn account causes further financial problems. Perhaps your rent doesn’t get paid or you bounce a check at the grocery store, and then you receive a letter from a collection agency saying you’re going to prison for writing bad checks. Payday loans don’t pay!

Community Financial Services Association of America, a trade group that represents payday lenders, defends the industry’s practices, insisting that the group’s members do take a borrower’s ability to repay into account. They contend the vast majority of payday borrowers weigh the risks and benefits before taking out a loan, arguing that most are aware of the overall financial costs.

Many borrowers instinctively know payday loans are a bad deal. However, there are decidedly few low-cost options when it comes to a short-term loan. Low wage earners faced with a high cost of living are ripe targets for payday lenders. If you don’t get paid for two weeks but need money now, what choice do you really have?

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