Jun 092009

Marcy wondered how they were going to get through the week with the little bit of money they had left after paying the bills. Marcy and her husband had been struggling to make ends meet for a few months now. If they shared a car, they wouldn’t have to put gas in the truck this week. If they ate less meat and more beans and dug deep into the freezer, they might be able to cut down on the grocery bill. This form of budgeting was taking its toll on Marcy’s nerves, marriage, and family. Towards the end of the month, there was always more month left than money.

Marcy had seen advertisements for “Pay Day Cash Loans” on the internet and on TV. She often wondered how these programs worked. Having become frustrated with her family’s tight budget, and wanting to purchase that new grill they had been eyeing since the weather turned warm, Marcy found an online company that would loan her $800 until her next payday. The $200 interest and fee charges seemed steep, but in order to have that grill for the weekend, she plunged ahead.

What is a “Pay Day Loan”?

Pay Day loans are short-term loans (usually two weeks or until your next paycheck) held against your checking account and secured with the promise to repay on your next payday. Upon the due date borrowers have the option to pay back the loan in full plus finance charges, or they can opt to float the balance due to another payday and only pay back the finance charge.

For example:

Pay Day Loan of $800 borrowed + $200 Finance charges = $1000 owed

Pay Day 2nd Friday of the Month –

Option 1: Pay back $1000 total ($800 owed + $200 finance charge)

Option 2: Pay back the $200 finance charge ONLY and float the $800 to Pay Day 4th Friday of the Month (on the 4th Friday of the month, the borrower would owe $800 borrowed + $200 finance charge – AGAIN, for a total of $1,200 owed).

These loans prey on families struggling to make ends meet. The option to pay back only the finance charge and “float” the balance (up to 4 times = $800 paid to borrow $800) is attractive for families who live paycheck to paycheck and have little disposable cash left over. Many consumers who engage in Pay Day loans end up borrowing an average of eight to thirteen loans per year – that means they are paying huge amounts in finance charges – around 600%.

Holidays, like Christmas, and the desire to take a summer getaway, are factors that drive consumers to borrow from these services. There are many more reasons why consumers come up short on income:

1. The Economy – many people have experienced the hardship of decreased income due to reduced wages, fewer hours worked, and loss of jobs. Some of these people are trying to maintain a standard of living that exceeds their income.

2. Poor planning – gone for many families are the days of the savings account. The average family should have three months’ salary saved up just in case. How many people truly are prepared? Emergencies that families are not prepared to face, such as a broken major appliance or auto repair bill, makes a Pay Day loan an attractive quick fix.

3. Materialism – our “have it all, right now” society sends detrimental messages to the American consumer, especially to young adults just establishing themselves financially. Many people have fallen victim to mounds of credit-card debt which is destroying their credit and their lives. (Watch the movie Maxed Out: http://astore.amazon.com/wwwthedougand-20/detail/B001AT49KC.)

4. Stress – the frustration and stress of living “pay to pay” has consumers seeking solutions and a way out – sadly, Pay Day loans are not a solution but a fix that can end up being more detrimental than beneficial to a family’s financial life.

If you’re considering using a Pay Day loan, stop and evaluate your need and ask yourself, is this really worth it?

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