Payday Loans Scam

Payday loans are a bad deal for borrowers. The negatives that are inherent to this type of loan are quickly exacerbated by people making poor choices, or just as often people with no choices.

Payday loans are named for the way this lending method got its start. Originally, the way a payday loan worked, was that you borrowed month, until payday and then you paid the loan back. The idea was that this could be bridge to your next paycheck if you had unexpected expenses or other issues that busted your budget and left you no options. In the years since this type of loan has morphed into no-win situation for people with no other options.

Why Take a Payday Loan

To understand how a payday loan works, and how they cause such so many problems, it is instructive to look at just how people use payday loans, and why.

Payday Loan Poor Sucker

As is often the case, and example can be particularly instructive. Let’s consider James. James gets paid once a month. On May 15th, his car has trouble. The mechanic says it will cost $300 to get it repaired, but James does not have $300 in his checking account and he doesn’t get paid until May 31st.

What are his options?

  • If James has any savings, or other assets, then, he can just use them to cover the $300. It’s a bummer, because he was saving for something else, but life happens.
  • If James doesn’t have enough savings, but he does have a credit card, then he can just use the card to pay for the repairs and then pay it off when his paycheck arrives. If that’s not enough money, he can always make payments to the credit card company. This isn’t great, but as you’ll see, it’s better than a payday loan.
  • If James doesn’t have a credit card, then he might be able to get a loan from a bank. However, this is a pretty small amount for a bank which won’t make much profit on such a small short-term loan, so they probably wouldn’t even do it, unless the bank offers payday loans, which some do.
  • Finally, if James has no savings, no credit cards (or is maxed on his cards), and no banking options, he can turn to friends and family for a loan.

At this point, James is really out of options, and he may turn to a payday lender. As you can see, most people with decent finances probably never go this route. Either some savings, or a credit card takes care of this situation for people in good financial shape.

A Good Payday Loan

Payday loans are never cheap. They should never be your first choice, and could never be considered a smart financial move, or good money move. However, in our example above, our friend James is out of options. He has to have his car fixed, and he has no way to pay for the repairs for two weeks. By then, James will be fired because he can’t get to his job, and we haven’t even discussed his family that needs transportation.

If James goes to a payday lender, they can give James $300 on the spot. James agrees to repay the $300 plus a $50 fee. This fee has numerous names, but, ironically, it is almost never called interest even though that is exactly what it is. No matter what this extra amount to be repaid is called, the upshot is always the same, James gets $300; he has to repay $350.

If you do the math, the interest rate is astronomical. Before you do 50 divided by 300 and call this a 16.67 percent interest rate, remember that interest rates are PER YEAR, not per month. In this case, James is paying 16.67% for just 15 days. That works out to just over 400 percent interest per year.

But, math isn’t real life, and James needs his car. He pays the mechanic, and then when he gets his paycheck, he shows backup at the lender with $350. In this case, James gets out of a jam for $50. All in all, it’s better than most of the alternatives.

A Bad Payday Loan

Unfortunately, this isn’t how payday loans end up working out for most people. What actually happens most of the time, is that come May 31st, James has bills to pay, groceries to buy, and he just doesn’t have $350 to pay back his loan.

Instead, James goes back to the lender, who offers to re-lend James the $300 if he just pays the $50 fee. This wouldn’t be so bad, except the payday lender doesn’t do this for free. A $300 loan comes with a $50 fee. Now, James is on the hook for $50 every month PLUS the $300 he borrowed.

This turns into an absolute nightmare, once James can’t cover the $50 fee and that gets rolled into the next loan. Now, James owes $400 and a $400 loan comes with a $60 fee. If he can’t pay the $60 fee next month…

Payday loans aren’t scams in that they are outright trickery and fraud, but the truth is that the lenders know most people won’t be able to pay these loan back, ever. So, the scam is that they lend them the money in the first place and then pressure the borrower to pay as much as possible for as long as possible. Often, they collect more in fees (interest) than they lent out in the first place, even though zero dollars is ever credited to the balance, this is the profit. Eventually James stops paying, stops answering phone calls, and takes another hit on his credit score, although if he had any to begin with, he probably would never have had to take the payday loan in the first place.

Lenders make a profit based upon getting enough people to pay long enough to cover the original amount of the loan plus a bit more. Then, they write off the original amount of the loan, plus any unpaid fees as “losses”, so they pay no taxes. Then, the make an additional profit when they sell the debts to collectors.

 

2 thoughts on “Payday Loans Scam”

  1. No doubt there are dis advantage of payday loans in fact there are so many scam payday loan companies have popped up in market but at the same time we can’t ignore payday loan’s advantages like they are very easy to avail,the give you loan like in minutes,hassle free process,they provide you loan even at bad credit score.When no bank is ready to provide loan during emergency,you can go for payday loans.

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  2. The payday loan has different which I really didn’t know. It has great advantages but also has some disadvantages. But if you accept the loan carefully then you will never get the bad side of it.

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