Do Payday Loans Ever Make Financial Sense?
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Do Payday Loans ever make the Financial sense?
A payday loan is often more as a way of treating the symptom than treating the actual disease. Many people have options.
by Hal M. Bundrick, CFP(r) Senior Writer | Personal Finance investment, financial planning, and investing Hal M. Bundrick is a personal finance writer and an expert on NerdWallet in financial matters. He is a certified financial planner and former financial consultant and Senior Investment Specialist of Wall Street firms. Hal was a consultant to businesses, families, nonprofits and trusts, and managed group employee retirement plans across The South and Midwest. Hal now works to make financial matters understandable and uncomplicated.
Jul 17, 2014
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There is ever a reason to take advantage of the option of a payday loan? Paycheck-to-paycheck living can bring you down. In the end, spending every penny of your earnings leaves no space for errors. Although this kind of behavior is thought of as a hallmark of the poor, research studies have revealed that a few «hand-to-mouth» households are actually wealthy. However, the majority of their assets aren’t readily or easily converted into cash, such as a home and retirement accounts. These folks may find themselves faced with an urgent need for funds , but not knowing how to access the money quickly.
— short-term high-interest, short-term loans that are typically backed by a borrower’s post-dated check — could be an appealing alternative. While these types of loans are dangerous for those with a limited funds, there could be times when resorting to payday lenders is a sensible option. However, it is usually as if treating the symptom than the disease.
Who can take out payday loans?
Living on the streets is a financial issue which affects Americans across all wealth levels, the U.S. Consumer Financial Protection Bureau (CFPB) in Washington says the median income of a payday loan borrower is less than $23,000. According to the Center for Responsible Lending (CRL) discovered that the typical borrower is white, female and from 25 to 44 years old.
Five socio-economic groups had the «highest chance» of obtaining the payday loan: individuals without having a degree from a university, African Americans, people who earn less than $40,000 per year and those who are separated or divorced, according to CRL which is headquartered at Durham, N.C.
It’s easy to find, but is it worth it?
When a cash need arises, payday loans — similar to simple to get. The borrower typically only has to provide a valid ID, proof of income and a personal checking account in order to be eligible. The lender typically expects either a post-dated check or electronic access to a borrower’s bank account to ensure the repayment. Credit scores aren’t analyzed and the capacity of the applicant to repay the loan in light of other expenses and debts isn’t assessed.
In exchange for quick access to much-needed cash The fees are high and range from $10 to $20 per $100 borrowed over two weeks. The Annual percentage rate (APR) is often near 400% and sometimes far higher. This has led to complete bans of payday lending or limits across 22 states including curbs on how many loans consumers are able to avail in a calendar year.
Most borrowers do not have the means to repay the loan or cover other routine expenses. A series of short-term, high-cost loans often result in these instances, which can trap several at a cost of hundreds of dollars in total charges according to the CFPB states. Consumers who made use of payday lenders usually did so frequently over a period of 12 months, the bureau said in the study it released last year. Nearly half of the borrowers used over 10 small-term loans in a year.
Can payday loans be a low-cost option?
However, when faced with a financial situation, what’s a person to do? It’s surprising, Moebs Services, an economic research firm based out of Lake Bluff, Ill., says payday loans can be a low-cost solution, compared with alternatives like overdrawing a checking account.
Banks are seeing an increase in overdraft charges, reflecting the strain that hand-to-mouth families have to endure in order to survive. The revenue stream was trend to grow by 1.6% to almost $32 billion in the last fiscal year, Moebs estimates.
With a simple example of $100 and comparing payday lender fees to typical bank , Moebs breaks down the amounts:
Payday loans and $18
Credit unions, $28
Thrifts and banks, $30
Wall Street banks, $35
«If price is a concern for your money needs, then payday lenders provide the lowest price they can offer,»» Moebs concludes. But the consumer agency says the majority of borrowers — nearly 10 million Americans will are able to roll over these loans every so often and, more often than not often, several times throughout the year.
Solutions to payday loans
In the event of an emergency cash requirement or a sudden cash crunch, a payday loan may be a viable temporary solution. However there is a problem. The Pew Charitable Trusts in Philadelphia showed that more than two thirds (69 percent) of payday loans are taken out for recurring, everyday expenseshowever, only 16% of them were taken out for emergencies that were unexpected. This highlights the root of the problem: the family that lives on their own who lives beyond their means, is digging itself into a deeper debt pit by relying on the services of a payday lender.
When asked what they’d do if they were not able to access payday loans, 81% stated that they would cut back on their expenses, as per a survey from 2012 Pew survey. For households that are wealthy and poor alike, who live pay-to-pay — spending less is one way to finally break the cycle of spiraling debt.
Take the test below to discover the other options to payday loans.
The author’s bio: Hal Bundrick is a personal finance journalist and a NerdWallet expert in money issues. A certified financial planner and an ex-financial advisor.
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