Resist the Temptation of Payday Loans

posted 2/19/20 -- Payday loans seem like an easy solution to a short-term problem, but they can be a trap that ensnares many who struggle to make ends meet.

Payday loans – also called check loans or cash advances – are small-dollar, short-term loans secured by your next paycheck or government benefit check (i.e. SSI, Social Security). They are attractive because they are quick and do not require good credit. In 2020, you can even apply online. Title loans are similar, except you use your car as collateral to secure the loan.

To qualify for these loans, you provide personal, financial and employment information. For payday loans, you must have a source of income, usually a job. Your loan is repaid, with interest, on the next date you get paid. If you can’t repay a payday loan on time, you can roll it over or extend it for an additional fee. If you can’t repay a title loan on time, you could lose your car.

Rolling over is how many people get trapped in a cycle of payday loans they can’t get out of, said LCCAA Client Services Coordinator Colette Park.

“People often overestimate their ability to repay debt,” she said. “Unlike other loans which you pay in installments, payday loans have to be paid off all at once. That difficulty often leads to repeated, expensive roll overs.”

Park related one story in which a $400 payday loan came with $120 in fees for a 16-day period and an annualized interest rate of 684 percent. The consumer rolled over the loan five times and ended up paying $600 in fees or 150% of the original loan.

Although Ohio caps payday loan interest rates at 28 percent, lenders can still charge monthly maintenance fees, loan origination fees, late fees and roll over fees, Park added. Approximately 80% of payday loans are renewed or rolled over within two weeks.

“It’s very easy to fall behind on your debt, entering a trap that’s hard to escape,” she said. “Payday loans are very expensive, sometimes misrepresented and frequently create more problems than they solve.”