In response to an earlier bankruptcy blog of mine on the subject of payday loans (Who’s Really Getting Paid On Payday Loans? ) several readers were quite indignant. The convenience of being able to get cash later at night after banks had closed seemed to be one big factor in their misguided fondness for payday loans. A second, more dangerous, argument that was written in by readers of the bankruptcy blog about payday loans needs to be debunked once and for all. Apparently some readers still think payday loans are less expensive than late charges on cards.
By the way, as a bankruptcy attorney in Indiana for more than twenty years, I haven’t changed my opinion one whit when it comes to this topic. I’ve worked with literally thousands of people over the years who found out the hard way what the dangers are in depending on payday lending.
I was especially gratified to see a section on this very topic in this month’s issue of The Readers’ Digest. Here, word-for-word, is what that article offers as the best advice for consumers: “If you’re really in a pinch, opt for a cash advance on your credit card (about 28% interest plus transaction fees)”. How can 28% interest ever be called a good idea? According to the Center for Responsible Lending (cites Readers’ Digest), payday loan interest averages 391% to 500% a year! In fact, fifteen states ban payday loans altogether or cap the interest. Indiana has put some protections in place. Finance charges are limited to 15% on the first $100, and the total charge on the initial loan may not exceed $35. The lender cannot renew more than three times, and the original principal must be lowered each time by 25%. The Center’s study found most payday borrowers do roll over their loans, ending up paying $793 to borrow $325!
So, don’t get me started on payday loans. I still rate that kind of financing a Minus Four Star rating. Three-figure percentage charges are an awfully high price to pay just for getting money after the banks are closed. Even more important, if you consistently find (as the Ziggy cartoon character was fond of saying) there’s “month left at the end of your money”, go out looking for professional help in managing your finances; payday loans aren’t “it”!.