Make Ends Meet: The good, bad and ugly of payday loans and quick cash
LOUISVILLE, Ky. (WAVE) - If you can't make ends meet and you need cash fast, many people look to a loan to fix their financial misfortune.
The simple truth is a lot of people can’t qualify for traditional loans because either they don’t make enough money or have poor credit. With few options for quick cash, some turn to payday loans, but those advances will cost you by charging high fees and high-interest rates. What seems to be a good deal often ends up as a debt trap for borrowers.
“Twelve million Americans have paid millions of dollars in unnecessary fees using payday loans,” Mark Lamkin, founder and CEO of Lamkin Wealth Management, told WAVE 3 News.
According to The Pew Charitable Trusts, those 12 million payday loan users pay about $9 billion in loan fees. Interest rates of payday loans are commonly disguised as fees that range from 300 to 500 percent annually.
“Three million of those are rolling this on average nine times,” Lamkin said.
In other words, three million people who have taken out a payday loan cannot pay it back within the two-week loan period, so they roll the debt over or re-borrow. When you do that, you can become caught in a cycle where you never have enough to pay off the loan. The amount you owe grows each time it is rolled over, and new fees and interest are added. A simple loan for $85 dollars could end up turning into a loan you must pay back for hundreds of dollars.
“That $85 is gonna cost you $235, or interest rate wise, you just paid 176 percent interest on your money,” Lamkin said, shaking his head in disapproval.
Borrowers can easily find themselves caught in a cycle of debt, taking out additional payday loans to repay the old one.
“They make their money by rolling this over time and time again,” Lamkin said.
Each state has its own laws when it comes to payday loans. Indiana has a long history of payday loans that started in the 1990s, and they are still legal and in demand. While payday loan regulations are somewhat restrictive in the state, average APR rates are still very high and can reach triple-digit numbers. Indiana limits the amount of a payday loan from a $50 minimum and a $500 maximum. Borrowers in Indiana are not allowed to get more than two loans at one time and the loans must be from different lenders.
The Kentucky Legislature also passed laws concerning the operation of payday loans for borrowers to be protected. Borrowers in Kentucky are not allowed to have more than two loans taken simultaneously from one lender per two weeks. The maximum total amount of all outstanding loans that a person can have at any one time in Kentucky is $500. The maximum loan term is sixty days and rollovers are prohibited.
“Kentucky's passed some legislation where you can only have 2 open payday loans,” Lamkin shared. “It used to be unlimited.”
Even with the law change that people can only have two open payday loans at one time in Kentucky, it still makes it possible for a single borrower to take out 52 loans a year.
“You're paying 15 percent for 14 days of money,” Lamkin said with a laugh. “That's not a good deal over time.”
Lamkin urges those in need of quick cash to first look at alternatives to the payday loan. According to a survey conducted by the Pew Charitable Trust, borrowers agree they had other options than payday loans:
· Reduce expenses (81%)
· Delay paying some bills (62%)
· Borrow from family and friends (57%)
· Get a loan from a bank or credit union (44%)
· Use a credit card (37%)
· Borrow from employer (17%)
“There’s a chance payday loans will be legislated out of business,” Lamkin stressed.
A replacement for the brick and mortar payday loan sites might be as close as your smartphone. There are now several apps that will allow you to take out a quick loan without the high fees or interest.
“You’re going to have to look at some advertisements for the cost of doing business,” Lamkin laughed. “There's nine apps that I found online that are all worthy of your viewers using.”
The nine apps on the top of Lamkin’s list that loan you money now:
· Rainy Day Lending
Most money apps do not consider the money you receive a ‘loan.’ It is an advance of money you make on the job.
“When you get paid you have to pay that off,” Lamkin explained. “They have access to your account. You can't roll it nine times”
Another loan alternative is to join a Credit Union.
“Credit Unions are more likely to give small dollar amounts to lower credit scoring individuals than any banking or private institution that's out there,” Lamkin shared. “You've got a lot better access to capital at a credit union.”
Technology has also brought about online banking. With an online bank, you give up branches, but you get other perks. You can earn a higher rate on your savings account or checking account because online banks have less overhead than banks with branches. The best online banks also charge low fees, if any, and support intuitive mobile apps.
“Don't be afraid of online banks that are FDIC insured,” Lamkin said. “Often, online banks will have personal loans that you don't have to have great credit for.”
If you find yourself constantly needing a loan to make ends meet, you likely have a bigger issue to address than getting quick cash to meet your needs.
“Your budget's wrong,” Lamkin stressed. “You've got to cut back. You can't spend this kind of money, and you're going to get caught in that debt cycle, and it's gonna lead to bankruptcy.”
The Consumer Financial Protection Bureau helps consumers by providing educational materials and accepting complaints. It supervises banks, lenders, and large non-bank entities, such as credit reporting agencies and debt collection companies. The Bureau also works to make credit card, mortgage, and other loan disclosures clearer, so consumers can understand their rights and responsibilities.
If you have any problems or questions, the CFPB can be a great resource.
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