Payday Loans: Short-Term Fix, Long-Term Problems

By Jordan Woods

None of us really knows when the next opportunity will come our way or when the next emergency could strike. This is one of the reasons that in one of our previous installments, we talked all about the methods and importance of saving. However, for those who have not implemented a saving and budgeting plan, an emergency is devastating and can to making a desperate decision: applying for a payday loan. A payday loan is a short-term loan with unreasonable fees. Statistics show that roughly 12 million Americans use payday loans between paychecks and end up paying over $9 billion dollars in loan fees. Furthermore, the average payday loan borrower (58%) needs roughly five months to financially recover from the loan. A look at the numbers will make it easy to see how what seems like a quick fix can have long-term consequences for our finances.

Let’s say your refrigerator stops working unexpectedly and you have to replace it immediately and you have limited resources to pull from to get the cash and an ad for cash advance loan comes on. You apply for the maximum loan amount for Michigan which is $600 plus the maximum fees lenders can charge, $76. When it is time to repay the loan, you will owe the original $676. $676 and a new refrigerator–not too bad, right? However, you are already living paycheck to paycheck–and now your next check is already short $676 because, especially with online lenders, they require access to your bank account so that they can collect on the loan on your next paycheck. You can request additional time to pay off the loan, however that will incur an additional fee. How about if you borrow a small amount just to help you float between pay periods? If you borrowed $100 (plus $15 in fees) every two weeks for a year, you’d end up paying $391 in loan fees for the year instead of putting that money into a savings plan.

It might be the case for you that without the loan, your rent payment might be late. Your credit card might be past due. But as we said in our installment on credit debt, it is much better to explain your circumstances to the people or companies you owe money to before running to take out short-term loans with high fees. The best way to avoid falling victim to predatory lending is by creating and sticking a savings and budgeting plan. Saving at least dollar a day will give $365 by the end of the year. Start small and work your way to a more aggressive savings plan as your confidence grows. Don’t get discouraged. Financial security is a marathon, not a sprint.

Your bank can be an ally in tough times. Their interest rates are infinitely more manageable and most banks will still protect you from the cycle of debt by not giving you unmanageable loans. Furthermore, the federal government has programs guarding against predatory practices in student and home lending. Visit for more information to protect against predatory lending practices.


First Independence Bank, Member FDIC, Equal Housing Lender

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