I was asked last week about an article on how payday loans can help you get out of debt.  It has taken me a couple of days to look into payday loans and figure out if they are an actual viable method to reducing debt.  My conclusion to this form of lending is that you have to be crazy to accept one or even go seek one out.  I also found out that many states now ban payday loan companies for their outlandish practices and massive interest rates.  Here is the main reason why you should never get a payday loan.

MASSIVE APR

After searching around, I was unable to find any payday loan vendor that had an APR anywhere near even the high-end of a credit card APR, which is around 29.99%.  I understand that payday loans are around for people that usually live paycheck to paycheck and need the money to pay bills or for repairs, but massive interest rates help no one.

I have seen commercials in the past for payday loans with APR’s ranging from 160% to 868% on very small loan amounts.  The article that I was asked about last week was advertising a company in the UK with an APR of nearly 3,000%!  Yes, you see that correctly, 3,000% is the standard APR for their loans.  I couldn’t even believe that would be legal in any country.  Let me break down a simple loan for you, just to provide you a visual of the numbers.

Loan Amount: $1,000

Interest: 160% / 868%

Total Amount of Loan after 1 year on 160% Loan:  $2,600

Total Amount of Loan after 1 year on 868% Loan: $9,680

If you took a $1,000 loan out with the UK company that charges 3,000% APR, then you would end up paying $31,000 over the course of a year.  Yes, for a measly $1,000, you would end up paying $30,000 in just interest alone.  This math just goes to show that there is no payday loan that will ever help you get out of debt.  They will only put you in more debt and cause you massive headaches along the way.  I do not, and will never, recommend payday loans to anyone.  These types of loans are banned in North Carolina where I live after people were getting charged astronomical interest amounts that they could never pay off.

Some will say that payday loans are never given out with one year terms, but when you have an interest rate of 800%, then you will never be able to expect anyone to payback a $1000 loan in a couple of days.  Most people won’t do it or don’t have the cash to pay off the loan quickly.  If you are living paycheck to paycheck, then you need to penny-pinch everything you have.  The reason why some of these lenders are in trouble is because their loan terms are so bad, that most people cannot pay back the loan at all, let alone in a year.

Possible Loan Solutions

There are other plausible solutions instead of payday loans.  I don’t recommend using a credit card, but when you compare the numbers, credit cards are easily a better solution.  Even if you have a high-interest rate credit card, you will still be saving money in the long run due to the difference in interest rates.

Here is a quick breakdown of the differences in the two:

Payday Loan

Amount: $1000

APR: 160%

Loan Term: 1 month

Interest Owed: $133.33

Total Amount Owed: $1133.33

Credit Card

Amount: $1000

APR: 29.99%

Loan Term: 1 month

Interest Owed: $24.99

Total Amount Owed: $1024.99

Difference Between Payday and Credit Card: $108.34

Another method besides using a credit card is to use a crowd-sourcing funding method.  These have become very popular lately and are easier to get than one may think.  There are many places to get crowd-sourced funding, but the most popular are Prosper and Lending Club.  These services allow a person to apply for a loan, just as they would a regular loan.  People looking for a loan provide their history and ability to payback the loan.  Prosper and Lending Club will then give you a grade depending on your credit score and ability to pay.  Most people funding the loans will need to see a viable reason why a loan is needed, like to make a mortgage payment or fix a car.

Once your loan goes live, people(which are technically called investors) can fund your loan with their own money.  Interest rates depend on your credit worthiness, but are much less than payday loans and sometimes less than credit card APR’s.  Multiple people can fund your loan or it can be just one.  The loan is unsecured, but you are required to pay it back.  You make the required payments to Prosper or Lending Club and then they redistribute your payment to the investors.  Once you pay off your loan, then you are done.  If you need more money, you can apply for another loan.  This is becoming a very popular way to get money.

The RoundUp

I would highly recommend anyone thinking about using a payday loan service to rethink it immediately.  You cannot use these services to help yourself get out of debt, or even reduce your debt.  You will end up paying much more in the long run than you ever will with other traditional or non-traditional ways of getting a loan.

Make sure to calculate the total cost of your loan with a payday loan company and then compare it to your credit card, or even the crowd-sourcing lending as we mentioned.  I know many people that have received loans through Prosper and Lending Club as well as many people that use these services to invest.  You have to find what service will work for you, but make sure to fully research every option that you have at your fingertips before making a decision.  We all need help from time to time, but we have to be vigilant about companies or people trying to take advantage of us when we are in need.

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8 Comments

  1. Hello.This article was really remarkable, especially because I was searching for thoughts on this topic last Tuesday.

  2. i got screwed by one of these companies in the past. i didn’t know how they really worked and found out the hard way.

    my loan from them was for $500 and by the time i paid if off, it equaled close to $1000. They just kept restarting the loan in some weird way, but i think that process is really illegal now.

    i would recommend anyone thinking about these loans to take grayson’s advice and find another place to get money.

    1. Thank you for comment. I am happy to hear from others that have had issues with Payday lenders. Your issue is exactly why North Carolina has banned them and I hope other states continue to do so.

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