Fast cash. Advance cash. Money that grows on trees. Visit any city street corner and chances are good that you’ll find a “payday lender.”
Payday loans have become a way of life for some people--and a way to slowly lose everything you own.
It begins when you write a post-dated check or give the store or lender permission to deduct the funds, plus interest, from your checking account. In exchange, you receive cash on the spot!
Lenders typically cash your check within two weeks. By that time, you’ve spent the cash advance and now your regular paycheck has gone to the lender. More bills are due, so you return for another payday loan. And another outrageous fee.
“It’s clearly become a problem,” says Jamie Dedmon, an STCU business development officer who hosts workshops for employers about the dangers of payday loans. “With the rising cost of living, some people feel that they must make desperate financial choices.
“A better solution,” she added, “is to talk first with STCU, where a credit card or signature loan is far less costly.”
| Payday loans | Maximum borrowing | Fees on the first $500 | Annual percentage rate |
|---|---|---|---|
| Washington | $700 | $75 | 391% |
| Idaho | $1,000 | No limit. Typically $82 to $200 | No limit. Typically 430% to 650% |
Sources: Washington State Department of Financial Institutions and Idaho Department of Finance. | |||
Research indicates that many people turn to payday loans when they are just a few hundred dollars short. With no emergency fund in place, they seek out a payday loan as a way to cover the cost of an unexpected car repair, medical bill, or rent check.
The typical borrower pays $793 in one year to borrow $325 from a payday loan store, says Spokane consumer advocate Doreen Kelsey. More than half of all payday borrowers are trapped in a cycle of loan after loan, never able to get ahead.
“Payday loans are financial meth,” Kelsey says.
Both Washington and Idaho have limits on how much you can borrow at one time, but only Washington caps the interest a lender may charge. Payday lenders in Washington can charge up to $15 per $100 borrowed, which works out to a 391 percent annual percentage rate. Payday lenders In Idaho typically charge from $16.50 to $25 on each $100 borrowed, equal to 430 percent to 650 percent APR, according to the Idaho Department of Finance.
A cash advance on an STCU credit card or a personal loan would be far less expensive than a payday loan. Even if you were charged 18% APR on a $500 loan, your total interest would be less than $90--for the entire year, not two weeks!
For most people, a payday loan is not necessary, says consumer advocate Doreen Kelsey. Here are some alternatives she suggests to avoid the payday loan cycle:
Finally, don’t forget to invest in an STCU First5 Savings Account. Your first $500 earns the highest rate of any STCU account, so you’ll earn money fast while keeping yourself protected from ever needing to seek “help” from a payday lender.
Call us at (509) 326-1954 or (208) 619-4000 or visit any of our convenient branch locations.
This article was published in the summer 2008 edition of OSI, the quarterly magazine for STCU members. Read OSI here.
