Monday, May 19, 2014
Cash Now, Pain Later -- 5 Reasons Why Everyone (Especially Minorities) Should Avoid Payday Loans
Payday loans are known by many names, such as cash advances, paycheck advances, quick cash, check loans, and others. They are growing like crazy all across America. Their offices and advertising can be seen everywhere. They offer quick approval and fast cash. And they are dangerous. Here's why.
What are payday loans?
Payday loans are short-term loans (usually two weeks) that offer quick cash for people who need money before their paycheck arrives. Most borrowers have poor credit, little money and seek help from payday loan companies out of desperation. The cash can be fast and easy, but it comes with a price.
#1 - High interest rates - payday advances come with a huge sticker price. Interest rates can be as high as 500 - 1800 percent! Seven U.S. states have no legal limit on the amount of interest they can charge.
#2 - High risk - the risk on payday loans is high. If you don't pay them back on time, interest, which is already high, will continue to accrue and even go higher until the loan is paid. The lender can also add various fees and penalties. In time, it is turned over to a collection agency which means they can garnish your wages and generally make your life miserable.
#3 - Getting trapped in the cycle - many people get caught in the payday advance cycle. When they pay back their loan, they will most likely be asked if they want another loan. The cash is easy and they are often tempted into another loan, then another loan. The consumer ends up paying tons on interest and wasting their money.
#4 - No plan for savings - one report showed that about 64 percent of borrowers from payday advance companies renew at least one loan one or more times and only 15 percent of borrowers repay their loan on time. Regularly paying high interest rates on payday cash advance loans eats up all reserves that could be used to build up savings for college or retirement.
#5 - They target minorities - another good reason to avoid payday loans is that these companies are especially targeting minorities (African Americans and Hispanics). Most payday loan centers can be found in minority neighborhoods, their advertisements have pictures of minorities, and the ads are placed where minorities will see them. But yet, they only create financial disasters for minorities.
One financial planner in New York City recommends borrowing from family or friends in an emergency, rather than being taken advantage of by payday loan companies, and waiting until you have the cash before making any purchases. Unforeseen circumstances like the loss of a job or illness can quickly change a person's financial situation and leave them vulnerable.