This Loan Will Cost You 400%
Would you take out a loan that cost 400% annually? How about 120%? Millions do today, and millions more could soon join their ranks thanks to some of the nation’s largest lenders. Wells Fargo, U.S. Bancorp, and Fifth Third Bancorp are among the big banks getting into high-rate microlending, Scripps Howard News Service reports.
Profits could be huge. All three banks will charge $10 for every $100 borrowed, a 120% interest rate for those who pay off their loans in a month. By contrast, the average variable-rate credit card charges 11.42% annually, according to Bankrate.com.
But if the banks are making out, payday lenders are doing even better. The average payday loan costs $15 to $30 for every $100 borrowed, at least a 50% premium to what the big banks charge and as much as 400% annually. Why the gulf in the interest rate? Payday lenders typically require borrowers to repay every two weeks. Many don’t, and suffer fees and compounding interest payments as a result.
“When many people get into a financial bind, they go to a payday lending store and borrow a few hundred dollars,” says Ethan Ewing of consumer advocacy and information site, Bills.com. “They plan to repay the loan in a week or two, when they have the money. But they pay a huge price. Payday loans can become a dangerous addiction that can cost hundreds or thousands of dollars a year.”
Credit: aresauburnphotos
If at this point you’re wondering how anyone ever pays off a payday loan, you aren’t the only one. Several states have taken action against the industry in recent years. Virginia just extracted an $85,000 settlement from payday lender Advance America, which it accused of 119 violations of its consumer-finance laws, reports the Richmond Times-Dispatch.
Payday lending’s usurious rates and dubious reputation has inspired advocacy groups and sites such as Bills.com to pitch alternatives for the cash-strapped. Ewing, in particular, sent me eight tips in a press release recently. Here are what I believe are his best two, with my comments below.
1. Talk to your creditor
Creditors want to get paid, and they’d rather get paid at full price. But they lose more if you don’t pay at all, or if your account gets referred to a collection agency. Negotiate first; borrow second. You may be surprised by how willing your doctor will be to establish payments for an uncovered procedure, or what your credit card vendor will do to keep you around.
2. Borrow from a friend or relative
Unlike a payday lender — or, for that matter, a big bank acting like a payday lender — your family and friends care about your well-being, and may be able to help you out on terms that you’ll get nowhere else. But you’re also putting your relationship at risk.
“Don’t use this option unless you know you can pay it back, and borrow only on a rare occasion,” Ewing says. He also advises that the agreement be stipulated in writing, including the repayment terms.
The Great Recession has put millions out of work, and too many are making do with payday loans. Many more could join their ranks now that big banks want a cut of the action. Either way, consumers lose — but only if we accept payday loans as an option. We don’t need to.
Tim Beyers is a professional freelance writer who has been a regular contributor to The Motley Fool since 2003. He is also the co-creator of Editorchat and curator of The Freelance Writer’s Helper. Visit his Website or find him on Twitter, @MileHighFool.
Tags: loans, payday loan | Categories: Debt, Investing |
