The payday loan industry has boomed over the past 2 decades. Payday lenders target financially strapped customers who don’t qualify for credit cards or have very low credit limits, mostly due to past financial problems. The typical customer is both desperate and not very good with money, making them easy prey for these financial predators.
Why do so many people get sucked into these schemes? First of all, a payday loan is like quicksand – incredibly easy to get into, but painfully difficult to get out of. From the moment you fill out an online application, money could be in your account within the hour. Getting out of a payday loan, meanwhile, is inversely difficult. Most applicants do not magically have more money when the loan is due in a few weeks, and they have to get an extension. When these extensions are factored in, the average loan length is 5 months, and that makes for a lot of interest payments, which in turn makes these companies rich.
That brings us to the second part of the problem. The industry is all smoke and mirrors, as companies hide the true costs of their services. Since payday loans are supposedly short-term, the interest rate could seem decent for someone who has a bad credit rating. But because the loans are normally extended, the annualized rates can rise as high as 500%. Let’s look at an example. If you take out a payday loan for 350 dollars, you have to pay around 50 dollars in interest and give back the money in 2 weeks. But the average time trapped in a payday loan scheme is 5 months, and waiting that long means 50 dollars of interest will turn into 500 dollars, which is way more than the initial 350 you got in the first place.
The third aspect is advertising. Widespread coverage on TV, social media, and the radio means that people generally have a good opinion of payday loan companies. Around 78% of loan recipients base their decision to borrow only on information supplied by these companies. That’s like getting all your nutritional advice from McDonalds. No wonder they get misled.
The thing that makes it hard to fight against the payday loan industry is that people have a genuine need for quick emergency cash. A payday loan might seem to make economic sense in a temporary financial slump, but in reality there is nearly always a much better alternative available.
Payday loans constitute a toxic, predatory industry that preys on financially illiterate customers with unhealthy spending habits. Taking out a payday loan is like flushing money down the toilet. No matter how badly you need cash, you should try literally anything other than getting a loan from these institutions.