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The payday lending trap

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You’re in a financial bind and need some quick cash. You’ve seen payday loan stores all over town and think “Maybe I should try that…”

Don’t fall into that trap! Getting a loan with a payday lender could send you down a deep hole that may take years to get out of. Here’s how payday lenders catch and hold consumers.  To receive cash, you write a check to them for the amount plus the finance charge, which the lender will cash the next time you get a paycheck. They’ll tell you finance charges range from $15 to $50 per $100, but won’t tell you exactly what the interest rate (or APR) will be. Interest rates can run from 390% to 780%, and if your state does not cap the maximum cost, the rates can be even higher!

Here’s the math to figure out what you’d end up paying by borrowing $400 from a payday lending store. There’s a finance charge of $50 and a 14-day term:

  • Divide the finance charge by the amount you’re borrowing. $50/$400 = .125
  • Multiply the answer by the number of days in a year. .125 x 365 = 45.625
  • Divide the answer by the number of days in the term. 45.625/ 14 = 3.2589
  • Move the decimal point to the right two places. This is your APR. 325.89%

At the end of your 14-day term, you have to pay them $450. But if you can’t pay it off entirely, you’ll have to roll the balance over, pay another $50 fee, as well as interest charges. At the end of your second term, your balance is almost $600, and if you can’t pay that off entirely, you roll it over again. See how quickly your $400 loan can cost you thousands of dollars?

So what are some alternatives? Here are some to consider:

  • Ask your employer for an advance on your next paycheck.
  • Consider asking family members or friends for a short-term loan.
  • If you were a military service member, you may be eligible for short-term lending or emergency relief assistance. Contact Military OneSource at 800-342-9647, or visit www.militaryonesource.mil for information.
  • Apply for a personal loan or line of credit through White Sands FCU. We offer loans with low, fixed interest rates.
  • Open a low-cost, low-interest credit card through White Sands FCU,and use it only for emergencies.

No one wants to find themselves in a financial emergency, but there are much better options than turning to a payday lender. To find out more about payday lending and learn about safer ways to get quick cash, visit the Consumer Federation of America webpage.  If you’d like help getting control of your spending, come see us. We’re committed to helping our members gain financial well-being and offer one-on-one financial counseling as well as additional resources to help you get control of your finances.

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