The Problem
A late rent payment, a major auto repair, a medical emergency with accompanying hospital bills…if you don’t have much money in savings, emergency financial needs like these can be scary and alarming. What can one do? Banks can take up to two weeks to approve a loan, and if your credit history isn’t super clear, they may not be able to help. Some businesses offer a hassle-free, easy solution to your problems. Have you seen those ads?
Quick Cash…Bad Credit? No Problem! Instant Approval
A loan in the form of a cash advance or short-term payments. It seems like the best answer, sometimes the only answer to a tough emergency financial situation …But is it really all it’s cracked up to be?
Below are some important facts to know before borrrowing from payday lenders.
The Too-Good-To-Be-True Solution?
There are two main types of short-term loans that these businesses offer:
- Payday Loans, Cash Advances, or Internet Loans
Payday loans are granted for as long as it takes to get your next paycheck (often two weeks). Typically, companies will ask you to fill out a check that is post-dated for your next payday. They keep the check and cash it for the amount of your loan on that date. Or they might ask for your bank account information to withdraw the funds directly.
The problem: Because these short term lenders have HUGE processing fees and interest rates, you will end up owing the lender way more than you needed to borrow. It can be nearly impossible to pay back the difference in two weeks’ time.
Example: Say you take out a two-week loan for $1000, at 700% APR. This means that by the end of two weeks, you will owe $1,270! Not only that, but it is often standard to have a “processing fee,” at least one hundred dollars, added on! If paying back $1,000 in two weeks, it will be even harder to afford nearly 1,300.
- Auto Title Loans
These are often granted for longer terms (usually thirty days) and the application requirements are usually fewer than payday or internet loans. Auto title lenders often do not even ask you to verify your income. However, the lender takes the title of your car as collateral.
The problem: If you cannot pay back an auto loan, the lenders can take your car! Think about it: your car may be the most reliable way to get to work to make money. If you default on your loan, not only do you still have to pay the loan back with extra fees, but it will be harder to get to your job to earn that money!
The Catch
However, the risks involved with short-term borrowing might seem worth it if you aren’t sure where to turn. Emergency expenses happen! The reason it is so easy to get approved for loans through businesses like these is that they are aware that you might not be able to pay it back…in fact, they count on borrowers defaulting, and make it easy to “roll over” or “refinance” a defaulted loan.
But here’s the trick. Any amount you pay on the loan simply goes toward the interest, not toward the principal (the original amount you needed to borrow). So the amount you have previously paid toward the first loan doesn’t actually pay down the total amount… the loan amount just gets bigger!
The nation’s largest short-term lending company has publicly stated that their company does not make profit until a customer “rolls over” their loan four or five times. Payday lenders benefit from customers defaulting because they can make more money! The longer a borrower is paying on a debt, the more profit they make from charging fees and interest!
The business model of payday and auto title lenders is specifically set up to keep vulnerable borrowers in a cycle of debt that can be almost impossible to escape.
What CAN You Do?
It is important to be informed as you make financial choices, especially if you are in a vulnerable situation and not sure where to go for help.
But don’t be afraid; there is hope for your situation, and a way out. It may not be easy, but there ARE people who can help you. Below are a couple of places to find help:
- Some churches and nonprofits will offerrent or utilities if you fall behind. If there is a nearby Catholic church, call to ask if they have a Society of St. Vincent de Paul conference. Or Click Here.
- Visit a food pantry. If you are struggling between paychecks, getting food assistance can help you save money on food, so you can other payments. Visit the website https://www.foodpantries.org/ to find one in your state.
- The website needhelppayingbills.com has a list of contacts who can help. It is organized by state.
- If you live in North Texas, you may qualify for our Mini Loan Program. Visit svdpdallas.org/mini-loan-program for more information.
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