I frequently see loan shops strewn across town. Many of these shops offer so-called “short term loans” also known as “Pay Day Loans.” While these loans are frequently touted as providing a much-needed benefit to those who are unable to borrow money elsewhere, they come with crippling consequences that you really need to be aware of. Today, I wanted to discuss the notorious Pay Day Loan and how it may throw our lives into a whirlpool of interest from which it’s almost impossible to escape.
The so-called “Short Term Loan” or Pay Day Loan is extremely dangerous and carries the highest interest rates. I’ve seen these loans exceed 500% per year. Pay Day loans are typically financed for a 2-week loan period with renewals available if the borrower needs more time. The amount typically paid each month on these loans is nearly half of the original amount borrowed. Many people are not able to afford more than the minimum interest payments and resort to renewing these loans each time they come due. When this happens, the interest paid each year may be 5 times the amount borrowed.
In Real Terms, if you were to borrow $1,000 at 500%, and you made the interest payments and renewed the loan each time it came due, the interest may reach $5,000 EACH YEAR in addition to the original $1,000.
What’s worse, the lender typically holds a postdated check that they can deposit if you’re late on your payment. This may drain your bank account and cause the other bills that come due to either bounce or run your bank account into overdraft. And THAT typically costs about $35 in bank fees each time that happens, driving you further into the ground.
As you can see, this may easily throw you into a downward spiral, leaving you without enough money to pay for your living expenses.