Put simply, a Pay Day loan (or its equivalent, called by fancier names like Advance Pay or Cash Advance or Convenient Cash) are high rate loans that either are designed or result in “trapping” its users for a long-term addiction to such loans. One study estimates that the average rate of interest (if calculated, since such loans do not “charge interest, but charge a fee for their service”) is about 390% per annum! So in fact for every dollar borrowed, you pay three dollars in interest in a year.
Now here is a quiz.
How often do Pay Day users return to use the same service at the same usurious (imputed) interest rate?
Again, a study estimates, about 76% of the time!
So like a narcotic, once you get addicted to receiving a Pay Day loan, most of you will not get out of the hell-hole for a long time. That is because most of us, as humans, tend to do what comes of a habit.
So typically you to the Pay Day window say on a Friday of the week you do not get paid. You “pledge” your next week’s paycheck for a fee. How much fee? say 5% of the pay check. Small amount of fee, right? WRONG! You are paying 5% effectively for a week, since your paycheck will already have been cashed next week by the lender. 5% a week amounts to 260% per annum.
It would of course be ridiculous to think of it that way if you were never to return to that window. So you pay 5% that week and live happily ever after, never darkening the Pay Day door. Unfortunately, as statistics show, most of the Pay Day users are repeat offenders. Yes I say offenders because they are robbing their family of hard earned dollars.
Pay Day lenders justify their practice, which by the way is perfectly legal, since the usual usury laws do not apply to them, in a variety of ways. And in fairness, they do serve a purpose–but similar to a doctor prescribing pain killers to an addict. Among the reasons cited by them: high default rate, high risk, difficulty in recovering bad loans, absence of alternative lenders who can serve this sector etc.
So the important question is–what can you do to avoid Pay Day borrowing. Here are some tips.
2. USE S.M.A.R.T. SAVING PLAN
S is for saving
M is for managing your expenditures
A is for accumulating useful assets
R is for reducing debt
T is for tracking your yields.
The important thing is to Start Saving. Force yourself to look at every item of cash expenditure and credit card and debit card expenditures (latter are considered “non-cash”). Here are some ways:
- Forget changing your wardrobe each season. Most of us, men or women, can do fine with about 10-12 pairs of wardrobe–and that includes shoes, ladies and jackets and ties, men!
- Eat out only on special occasions. If you have an urge to eat out, try cooking a new recipe at home. It is a great way to bond with your spouse, son, daughter or older parent
- Start a home business, even as a hobby, but make sure it does not burn cash beyond a reasonable period, like 3-6 months
- Start a retirement plan, a college plan for your child, or simply a 401 K if your employer offers one. You will be surprised how quickly you can adapt to living without that slice of your pay check
- If you have to borrow, try a lower amount with a bank–and insist on paying back over a shorter period. Even borrowing from your 401K is better than Pay Day
- Maximize your home loan or home equity loan
Good Luck. And please, please, stay out of Pay Day loans. They can be as harmful to your financial health as drug overdose for your body.