Shark Attack

By Tawny Maya McCray

January 15, 2016 4 min read

Unexpected expenses can sometimes hit us out of nowhere. When that happens, we often need to come up with some extra cash -- and fast. Many people turn to payday loans to help get them out of a bind, but those loans may be doing them more harm than good.

A payday loan is a small cash loan that is expected to be repaid with the borrower's next paycheck. Finance charges can run anywhere from 15 to 30 percent of the amount being borrowed. Since it's 15 to 30 percent on just a few weeks, it's comparable to getting a loan with an annual percentage rate of nearly 800 percent.

Kevin Weeks, president of Financial Counseling Association of America, says people opt to go with payday loans because they are easy to qualify for and get money the same day.

"Some of these companies are open around the clock, making them extremely convenient to someone who is desperate," Weeks says.

That desperation, he said, can come from unexpected expenses like car repairs or medical expenses not covered by insurance. But he warns that borrowing against future paychecks ignores the fact that there will be future expenses and emergencies.

"Meeting an unexpected expense with a payday loan does not make the debt or the expense go away; it only creates an even greater debt that is more difficult to resolve," Weeks says.

Because the loan carries such high interest rates, paying it back can be hard to do, especially since the entire amount is due all at once. The result is that borrowers often need to extend the loan, which causes even more fees, or apply for a new loan altogether.

"These rollovers are a common practice that can result in an almost-endless cycle of borrowing and mounting debt," Weeks says.

Lina Franco, 38, says she had to resort to using payday loans twice when she was in her 20s so that she could make rent.

"I was living on my own with a minimum-wage job and learning the hard way that I wasn't very good at budgeting," she says, adding that both times she got the loan from a local Money Tree. "Obviously people go to these places because they don't make enough to cover whatever expenses they have. High interest rates make it even harder. You can really get trapped in a cycle."

Franco, whose aunt, cousin and sister have also used payday loans, says the loans were hard for her to repay because she was still broke on paydays and trying to catch up.

To make matters worse, both loans were for less than she needed -- she only qualified for $300 when she needed $500 -- because she didn't make much and they limited what she was allowed to borrow. To make up the difference the first time she borrowed from a friend; the second time she had to supplement with a cash advance from a credit card.

Weeks says fee caps are one way to ease the burden of paying back payday loans, because they would limit the number of times the loans could be rolled over. Currently, only about 20 states have enacted those kinds of regulations.

An article about the dangers of payday loans states that people who resort to payday loans do not follow a monthly budget and often have a low income. It recommends that to eliminate the need for a payday loan people should follow a budget where they are working on getting out of debt and putting money in savings to get by. The article says you should save up at least $1,000 to cover emergencies.

Weeks says before getting a payday loan people should first explore other options, such as selling an asset, borrowing from family or friends, reaching out to a credit union or bank for a personal loan or getting a credit card cash advance.

"A payday loan is probably one of the worst ways to access cash and simply should be avoided if at all possible," he said. "If a payday loan is someone's last resort it should only be used after every other option is explored."

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