Payday Loans: Disadvantages & Alternatives

To stop the practice, a 2007 federal law capped annualized payday-loan interest at 36% for active-duty service personnel and their families. You simply walk into a store with a pay stub, ID such as a driver’s license and a blank check from your checkbook. The clerk will offer a small amount, typically $100 to $500, that is due when you’re paid next. You will commit to paying what might sound like a reasonable amount – say $15 for every $100 borrowed. Federal student loans, you can call your loan servicer and see if you can defer your loans or put them in forbearance. You can also consider an income-driven repayment plan, where your monthly payments are lowered to a small portion of your discretionary income.

But as payday loan revenue declines, issuers of subprime credit cards have made big gains, keeping the level of all subprime consumer lending relatively constant in the past several years. Payday lenders advertise on TV, radio, online and through the mail, targeting working people who can’t quite get by paycheck to paycheck. Though the loans are advertised as helpful for unexpected emergencies, seven out of 10 borrowers use them for regular, recurring expenses such as rent and utilities. The simplicity of borrowing and the easy access to cash make payday lending appealing to many consumers, mostly those who have little or no access to conventional credit.

If you can’t pay back the loan promptly, fees can add up, leading to a debt trap that’s hard to get out of. Because of this, you should only take out a payday loan if you are absolutely sure that you can pay it back. If you repay your payday loan on time, then your credit score shouldn’t be affected. On the other hand, if you default on your loan and your debt is placed in the hands of a collection agency, then you will see a dip in your score. This means that you do not have to give the lender any collateral or borrow against a valuable item as you do in a pawn shop.

As many as 12 million Americans use payday loans each year, according to extensive research by the Pew Charitable Trusts. As previous St. Louis Fed research has noted, many people seem to have a love-hate relationship with them. You can also find helpful information about payday loan refunds on Debt Camel’s website debtcamel.co.uk. Debt Camel has template letters that you can adapt and use to start your complaint with the payday loan company. Alternatively, you could use the Resolver website to make your complaint.

This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System. Payday loans can be helpful, but Bennett advises exercising caution when dealing with them. Use an online benefits checker, for example, the Benefits Calculator and the Grants Search tool on the Turn2us website

 

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In addition, there appears to be no evidence of unmet demand for small dollar credit in states which prohibit or strictly limit payday lending. The likelihood that a family will use a payday loan increases if they are unbanked or underbanked, or lack access to a traditional deposit bank account. In an American context the families who will use a payday loan are disproportionately either of black or Hispanic descent, recent immigrants, and/or undereducated. These individuals are least able to secure normal, lower interest rate forms of credit.

Texas’ Office of the Consumer Credit Commissioner collected data on 2012 payday loan usage, and found that refinances accounted for $2.01 billion in loan volume, compared with $1.08 billion in initial loan volume. A letter to the editor from an industry expert argued that other studies have found that consumers fare better when payday loans are available to them. Pew’s reports have focused on how payday lending can be improved, but have not assessed whether consumers fare better with or without access to high-interest loans. Pew’s demographic analysis was based on a random digit dialing survey of 33,576 people, including 1,855 payday loan borrowers.

Few data sets measure payday loan use, and those that do are typically too small in sample size or too limited in scope to answer many of the questions important to policy. Moreover, it is difficult to find plausibly exogenous variation in payday loan usage—those who use payday loans are likely to be different in unobservable ways from those who do not. Consequently, important basic questions about payday lending remain unanswered. “The biggest danger of payday loans is when they turn from a short-term stopgap into a long-term drain on your finances,” Zhou says. Unfortunately, only 14 percent of payday loan borrowers can’t afford to pay the loan back.

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