As if we needed another reminder, the Today Show had a piece this morning on the dangers of payday loans. They did, however, include some interesting numbers that really drive home how bad these loans can be.
For example, they highlighted a borrower named Mary who took on a $400 loan in a pinch, opting for a payday loan because “a commercial loan would’ve taken days.” Unfortunately for Mary, the interest rate was so high that she wasn’t able to pay of the loan immediately, so the payments continued to accrue.
By the time Mary finally paid off her loan a year later, she had paid $1420 in interest alone. That works out to well over 300% over the course of a year.
While some states have started regulating payday loans, others haven’t, and the industry is apparently flourishing. At the same time, the Better Business Bureau reports that they’ve received more payday lending complaints so far in 2011 than in all of 2009 and 2010 combined.
While payday loans can arguably be helpful in an emergency — assuming that you actually pay it off at your next payday — they can result in financial disaster if you’re unable to pay off your loan quickly.
Jean Chatzky, Today’s financial editor, also pointed out that payday loans are rarely a one-time thing. While the typical payday loan may only be for a few hundred dollars, the average borrower will take out nine such loans over the course of a year.
Chatzky went on to argue that credit card cash advances or your bank’s overdraft protection — products that she normally warns consumers about — are actually much cheaper options, and should be used before you ever consider a payday loan.
While these sorts of things don’t really help the unbanked, they could be decent alternatives for those with access to them. Of course, at the risk of beating a dead horse, nothing beats having ready access to an emergency fund at your favorite bank or credit union.