You see them on almost every corner, often in the older and lower income areas of many cities: payday lenders and strip mall finance companies. They often share the block and even the same building with smoke shops, rent-to-own stores, or used car dealers that advertise title loans or car-equity loans.
Through a payday lender, whether the corner brick and mortar or an online payday or finance company, you can get cash almost instantly, up to $500 or more in some places, with no credit check, with bad credit, with no credit, and even after filing for bankruptcy. They advertise speed and convenience.
Are payday loans a good idea for someone needing cash in a hurry?
Payday loans provide a quick infusion of cash into a household without a credit check and sometimes without employment verification or even a bank account, but they come at extremely high, even predatory levels of interest equivalent to 100% to 700% APR or more.
If a consumer finds her or himself in a financially challenging situation, a loan at 500% or higher interest rate will provide relief for only a very short time, followed by a much worse situation than before.
For many consumers, a “quick & easy” small payday loan, cash advance, or title loan can seem quite tempting. They often think of these loan products as the last resort type of loan, like a loan that you only take out when there’s an emergency expense. However, studies suggest that these same borrowers could avoid these expensive loans by building a personal emergency savings, cutting back on household expenses, delaying the payment of some bills, selling possessions, or relying on family members for temporary assistance.
Because these high-fee loans are so easy to qualify for, many borrowers fall for the marketing promises of “quick & easy” money when facing eviction, dealing with a broken appliance, or when about to lose their utility service. The temptation to borrow money at any price overcomes logical options that would require additional time and effort. Too many people believe payday loans and similar borrowing options offer some sort of safety net for periods of financial emergencies.
However, research shows that these expensive lending products contribute to pushing borrowers over the financial cliff where they find it impossible to repay debt after debt after debt (kind of like the Red Skull in Avengers: End Game, but without much possibility to returning to financial life). Preventing personal emergencies with an emergency savings fund will be much less painful and far more effective than any payday loan available.
Can payday loans help if you need money fast?
Payday loans, with annualized interest rates of 400% or more, are more likely to make financial emergencies worse rather than better. With high fees and short repayment terms, these loans typically push borrowers into more new debts used to pay off previous payday loans.
A Close Look at the Largest Payday Lenders in America
Let’s see how a few of the largest short-term lenders in the US pitch their loan products to consumers and compare these promises to the reality their customers are living.
One lender reviewed for this post claims to offer a variety of its speedy loans that range from just $50 dollars all the way to $26,000. They tell their site visitors with emergency expenses or who face cash shortfalls that they deposit a loan into their accounts as soon as today! Their website emphasizes the ease, speed, and convenience of their lending processes.
Another high-fee lender, known as a car title lender, provides small loans secured by the borrower’s vehicle pink slip signed over to the lender in case the borrower cannot repay the full loan within the borrowing term (typically 30 days).
The opening pitch on the website notifies the visitors that they will find both car title loans and car title pawn loans here, each with a short approval time and regardless of the visitor’s good or bad credit. Like similar services, this site shows stock images of young people holding cash and wearing big smiles on their faces, suggesting their service is a happy decision that provides relief and solutions to financial problems. The company lists the following benefits of title loans and title pawns:
- Same Day Cash
- Quick Approval
- All Credit Accepted
- Keep Driving Your Vehicle
- Competitive Rates
Finally, the last payday lender reviewed here claims to be a one-stop money shop, highlighting convenience. Like other lenders, the site stresses a fast solution, saying it takes just five minutes to apply. They offer both payday loans and title loans. Like the other lender noted above, they showcase stock images of smiling people happily displaying generous amounts of cash in hand.
Who Takes out a Payday Loan and Why?
In the United States, on average, 12 million adults take out Payday Loans each year. In fact, the typical borrower takes out eight loans over the course of a year and spends over $500 in interest fees.
According to the studies, payday loan borrowers are most likely to be white women aged 25 to 44 and without a 4-year college degree, or African Americans in general. The typical payday loan borrower earns below $40,000 per year. That’s about one-third below the median household income in the US.
Despite the payday loan industry claims of providing emergency funds when needed, most borrowers use these expensive loans to pay for recurring bills like rent or mortgage, groceries, and utilities. These findings imply that instead of offering emergency relief, payday loans take large chunks of fees out of the borrower’s budgets that they would otherwise use to satisfactorily meet their recurring obligations.