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A Game That’s Hardly Ever Won: Payday Lending By Janice Parker

When cash is tight and there is no money in savings to fall back on, some people turn to payday and similar loans to make ends meet. Though these loans offer quick access to money, they often carry an average annual interest rate of over 300 percent, in addition to other fees and become debt traps primarily for families who are already struggling. Yeah, I know you’re saying “c’mon Janice, everyone knows this stuff already”. Well if we know better, then why aren’t we doing better!

One of the worst financial decisions one can make is to take out a payday loan. In fact, the only thing worse than a payday loan is multiple payday loans. Generally consumers who take out payday loans can’t afford to pay back all of the money they owe by their next paycheck, therefore leading them into a vicious cycle of a debt traps. On average, those who borrow from payday lenders, average eight loans of around $375 each and pay around $520 in interest. Even more bizarre is that nearly 70% of borrowers took out the loans to cover living expenses like utilities, credit card bills, housing and food.

If you don’t see as many payday lending businesses in the area, it’s because they’ve now become more accessible online. Many lenders offer loans to borrowers over the Internet. The size of the online payday lending market is difficult to measure for many reasons, but a recent industry analyst estimated that the online lenders alone received approximately $3.1 billion in fees in 2015. Additionally, in a Consumer Financial Protection Bureau (CFPB) report its one of the reasons that Google has announced that they will be banning payday loan ads from their website.

The Consumer Financial Protection Bureau is working to end payday debt traps. The CFPB has recently announced a proposed rule that would require lenders to determine whether borrowers can afford to pay back their loans. The proposed rule would also cut off repeated debit attempts that rack up fees and make it harder for consumers to get out of debt. These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans.

A healthy financial plan starts with behavior. Any plan that involves taking out a payday loan at 200% interest to pay basic household needs is a terrible plan. Instead of taking out a loan, examine your budget and begin to cut unnecessary expenses. If you still determine that you are falling short then maybe it’s time to look at increasing income with a second job. Make an effort to save a $1,000 emergency fund and borrow from yourself!

Lastly, if you feel like you are drowning in water trying to keep up with your payday loans, then you should seek out options from your financial institution for a small dollar loan that offers much lower interest rates to pay off the payday loans. No matter your situation, don’t fall prey to the payday loan trap, because it’s a game you’ll likely never win.