Pros and Cons of Payday Loans & Links to Wealth Building Resources
Get ready for Barbara Friedberg’s upcoming book,
”How to Get Rich; Wealth Building Guide for the Financially Illiterate.”
“Polonius: Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” Shakespeare in Hamlet Act 1, scene 3:
Clearly Shakespeare was unfamiliar with “no money down” mortgages, or 1 percent interest on a car loan. Actually, Shadespeare didn’t even have a car:).
In modern society, loans are easily available for almost every whim and desire. Just pick up your credit card, charge it, and pay the balance off at your leisure. The range of borrowing options ranges from short term payday loans to 40 year home mortgages. Few citizens avoid debt.
Payday Loans Help Borrowers with More Month than Money
Since the inauguration of this website, almost three years ago, I’ve maintained countless “idea files” stuffed with articles and notes. Rarely do I refer to them, as my current reading diet of The Wall Street Journal, Money Magazine, and Business Week keeps the ideas flowing. Today was an exception as I dug into a dusty file and found an article (from Bloomburg Businessweek, May 24, 2010) called “Payday Nation”, written by Gary Rivlin, the author of Broke, USA: From Pawnshops to Poverty, Inc.-How the Working Poor Became Big Business. He talks about the inception of the payday loan industry which makes short term loans to almost anyone with a paycheck. For $45 bucks interest you get a $300 advance on your paycheck, to be paid back in a a couple of weeks. No one cares that the interest, if calculated annually would hit strospheric levels. The borrowers need a few bucks to carry them over until the paycheck arrives and the lenders gladly accept high default rates in an industry which enjoys a 23.8 percent return on investment.
Are Payday Loans Helpful or Harmful?
It depends. If you’re the exception and take out a payday loan very occasionally and pay it back on time, there’s probably no harm and it may be your only option. But most borrowers roll their loans over again and again paying high interest rates and continuing a cycle of spending more than they earn. I understand that it’s really expensive to live in today’s society, with food costs alone growing faster than the overall rate of inflation. It would be presumptuous of me to suggest that these borrowers cut back or take on another job, without knowing their individual situations. Yet, in the long run, you will improve your financial health by avoiding regular borrowing with payday loans and figuring out how to transfer some of your income into a bank savings account.
If you are someone who has gotten themselves in over their heads with debt, there is an opportunity to learn how to get out by participating in the Debt Movement. This is a broad effort of bloggers and businesses spearheaded by Good Financial Cents and Ready for Zero. There’s even a scholarship available for participants.
Wealth Building Links
- Frugal Rules; Frugal Rules to Live By
- Ask Liz Weston; How to Keep Mortgage Debt from Wrecking your Retirement
- Financial Highway; How Long do Negative Items Remain on Your Credit Report?
- Financial Samurai; How Much will a Foreclosure Hurt My Credit Score?
- Surviving and Thriving; 13 Ways to Prepare for Income Reduction
- The College Investor; The 5 Most Common Money Problems (and tips for dealing with them)
- Oblivious Investor; 2013 Tax Brackets
- Wealth Informatics; Tip # 9 Go Cash for the Rest of the Month
- The Money Principle; New Years Resolutions, About Saving and Wasting
- Mint Life Blog; Emergency Fund 101- How to Start Saving for a Rainy Day
Barb Across the Blogosphere
Carnival of Financial Camaraderie at Master the Art of Saving
Finance Carnival for Young Adults at 20s Finances
Carnival of Financial Planning at The Savvy Scot
Carnival of Retirement at Master the Art of Saving
Carnival of MoneyPros at See Debt Run
Yakezie Carnival at Money Wise Pastor
Have you ever borrowed with a Payday Loan? Is debt a problem in your life?
image credit; google images_i teach i coach i blog
In general, payday loans are really bad options for most people in a tight spot. Obviously, everyone has different situations that might lead them to a payday loan business, but the amount of the actual loan ($250 – 500 max) isn’t worth taking one out. It’s a cyclical debt trap.
Little House recently posted..Inspiration for Smaller Living
Thanks for the mention Barb! I think many people don’t realize that quite a number of the payday loan firms are run by some of the bigger banks around. For example, I know Wells Fargo runs one of the bigger ones. I think that generally they’re bad and would only recommend them if you’re in danger of losing electricity that day or have no food to put on the table that night. Though, I would usually suggest other means to get the money you need and then look at the underlying cause of the money problem. Personally, I think that I’d sell plasma before getting a payday loan.
John S @ Frugal Rules recently posted..Three Ways Advertising Companies Tempt You to Forsake Frugality
Anyone I know who has used a payday loan can’t get out of the cycle once they start. It just gets worse and worse and the interest fees just increase. I would definitely look for safer options if it was me.
Miss T @ Prairie Eco-Thrifter recently posted..How To Recover From A Home Fire
There are times when a PayDay loan makes sense but this has to be when there is no alternative, including more careful management of resources that are available. But if you need to pay the utility bill or your electricity will be cut off and you are sure of the pay to come, I guess it’s OK.
Mind you, what did people do before electricity?
For ***’* sake don’t roll it over!
Thnaks for the mention too, Barbara!
John@MoneyPrinciple recently posted..Does it have to be so complex? Three mental shifts to simplify your financial life
@Little, John, Miss T, & John, I love the comment “what did people do before they had electricity?” I think we’d all be surprised at what we can do without. I hate to speak for those who absolutely have no alternative, and I’m sure they are out there…. But for the rest of the folks dependent on payday loans, mindful spending; skip the lottery ticket and lunch out. Eat beans and rice and peanut butter sandwiches for awhile (I certainly do), and look for creative ways to save.
Barbara Friedberg recently posted..I BONDS DEMYSTIFIED; GET GOOD RETURNS ON YOUR CASH
Payday loans are a life saver for many people who are mostly never going to be in the regular credit world. They either have a poor credit score from not paying their debts or have never been able to successfully get credit. Payday loans would not be so popular if there wasn’t a need.
Dave recently posted..Cheap Ways to Increase the Value of Your Home
Hi Dave, Absolutely. Very clear point, if people didn’t need them, payday loans would not exist. The key is to slowly build financial resources so that the payday borrowers can break the cycle of continuous borrowing.
Barb recently posted..CRUCIAL SECRET TO WEALTH BUILDING
Payday loans are almost never a good idea. They’re so expensive that it’s difficult to pay them off, and they often end up costing more than borrowers ever imagined.
Although the federal Truth in Lending Act requires payday lenders to disclose their finance charges, these establishments have gotten a bad reputation for their predatory lending practices.
we found your blog about payday loans very interesting and informative,
we like the research and offers you make to in the loans industry.
For more information regarding payday loans and further discussion please visit our site.
Hello Barb,
I agree that payday loans have caused trouble because of its high interest rate nature. But it has also helped many people. You can’t ignore it.
After reading full blog, I think it is necessary to write few points-
>> Apply for payday loans only when you are in emergency and there is no way to get money
>> Do not apply for payday loans if you are unable to repay it on repayment date which is mostly 14 days
mark@QuickPaydayLoans recently posted..Why Use Payday Loans In Times of Financial Crises
I like the way you are describing your thoughts in words. These short term loans are meant for very occasional situation where you dare to pay the high APR amount. Consider a situation when you are nearly out of cash and in a road accident you or someone close to you is hurt and need immediate medical care. You paid a part of the cost of treatment and now need more for more expenses. If your next payday is still few days or weeks away then Payday Loans are best way to manage such critical conditions.
Mariya@usapaydayloan recently posted..Senior Citizens Turning towards Payday Loans Increasingly – A Report