The good, bad and ugly of payday loans and quick cash
LOUISVILLE, Ky. (WAVE) — If you can’t make ends meet and need cash fast, many people turn to a loan to fix their financial misfortune.
The simple truth is that many people can’t qualify for traditional loans because they don’t make enough money or have poor credit. With few options for quick cash, some are turning to payday loans, but these advances will cost you by charging high fees and high interest rates. What seems like a good deal often ends up becoming a debt trap for borrowers.
“Twelve million Americans have paid millions of dollars in unnecessary fees using payday loans,” Mark Lamkin, founder and CEO of Lamkin Wealth Management, told WAVE 3 News.
According to The Pew Charitable Trusts, these 12 million payday loan users pay around $9 billion in loan fees. Payday loan interest rates are usually disguised as fees ranging from 300-500% per annum.
“Three million of them roll that an average of nine times,” Lamkin said.
In other words, three million people who took out a payday loan can’t pay it back within the two-week loan period, so they roll over the debt or re-borrow. When you do this you can get caught in a cycle where you never have enough to repay the loan. The amount you owe increases each time it is deferred, and new fees and interest are added. A simple loan of 85 dollars could end up turning into a loan that you will have to repay for hundreds of dollars.
“That $85 is going to cost you $235, or in interest rate terms, you just paid 176% interest on your money,” Lamkin said, shaking his head in disapproval.
Borrowers can easily get caught in a cycle of debt and take out additional payday loans to pay off the old one.
“They make their money rolling this over and over again,” Lamkin said.
Each state has its own payday loan laws. Indiana has a long history of payday loans that began in the 1990s, and they are still legal and in demand. While payday loan regulations are somewhat restrictive in the state, average APR rates are still very high and can reach triple digit numbers. Indiana limits the amount of a payday loan between a minimum of $50 and a maximum of $500. Borrowers in Indiana are not allowed to take out more than two loans at a time, and the loans must be from different lenders.
The Kentucky Legislature has also passed laws regarding the operation of payday loans for borrowers to protect. Borrowers in Kentucky are not allowed to take out more than two loans simultaneously from a lender every two weeks. The maximum total amount of all outstanding loans a person can have at any time in Kentucky is $500. The maximum loan term is sixty days and rollovers are prohibited.
“Kentucky passed legislation that you can only have 2 open payday loans,” Lamkin explained. “Before, it was unlimited.”
Even with the law change that people can only have two payday loans open at a time in Kentucky, that still allows a single borrower to take out 52 loans a year.
“You pay 15% for 14 days of money,” Lamkin said with a laugh. “It’s not a good deal in time.”
Lamkin urges those who need cash fast to consider payday loan alternatives first. According to a survey conducted by the Pew Charitable Trust, borrowers agree they had options other than payday loans:
· Reduce expenses (81%)
· Delaying payment of certain bills (62%)
· Borrow from family and friends (57%)
· Getting a loan from a bank or credit union (44%)
· Use a credit card (37%)
· Borrow from employer (17%)
“There is a chance that payday loans will be prohibited by law,” Lamkin pointed out.
A replacement for brick-and-mortar payday loan sites could be as close as your smartphone. There are now several applications that will allow you to take out a quick loan without high fees or interest.
“You’re going to have to watch ads for the cost of doing business,” laughed Lamkin. “There are nine apps I found online that are all worthy of your viewers to use.”
The top nine apps on Lamkin’s list that lend you money now:
· To win
· Daily Pay
· flexible salary
· Ready for rainy days
Most money apps don’t consider the money you receive a “loan.” It’s a cash advance that you make at work.
“When you get paid, you have to pay it back,” Lamkin explained. “They have access to your account. You can’t roll it nine times”
Another lending alternative is to join a credit union.
“Credit unions are more likely to give small amounts of money to people with lower credit scores than any banking or private institution that exists,” Lamkin explained. “You have much better access to capital in a credit union.”
Technology has also brought online banking. With an online bank, you forgo branches, but get other benefits. You can earn a higher rate on your savings account or checking account because online banks have less overhead than branch banks. The best online banks also charge low fees, if any, and support intuitive mobile apps.
“Don’t be afraid of online banks that are FDIC insured,” Lamkin said. “Often, online banks offer personal loans that you don’t need to have great credit for.”
If you constantly need a loan to make ends meet, you probably have a bigger problem than getting quick cash to meet your needs.
“Your budget is wrong,” Lamkin pointed out. “We have to reduce. You can’t spend that kind of money, and you’re going to get caught up in this cycle of debt, and that’s going to lead to bankruptcy.
The Consumer Financial Protection Bureau helps consumers by providing educational materials and accepting complaints. It oversees banks, lenders and large non-bank entities, such as credit reporting agencies and debt collection companies. The Bureau is also working to make information about credit cards, mortgages and other loans clearer, so consumers can understand their rights and responsibilities.
If you have any problems or questions, the CFPB can be a great resource.
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