The Problem with Payday Loans


Fees from Payday Loans Can Add Up!

Chances are you either have used a payday lender or know someone who has.  Payday lenders will tell you that the fees they charge for a two week loan can be less costly than the fees paid for late charges and/or overdraft fees.  There may be some truth to this, but in many cases the consumer is unable to repay the loan in two weeks.  When this happens, the fees from the payday loan begin to add up fast. 
 

Real Payday Loan Example:

Here is a real example from one of our members who got trapped in a payday loan. On May 1st, because she had car repairs that took most of her pay, Jane was short for her rent and took out a payday loan for $500.  On May 15th, the loan was repaid by an automatic debit to her account of $567.  For a two week loan, Jane paid $67.
 

Because most of her $630 paycheck went to the payday lender, Jane did not have enough to pay all of her bills and got another payday loan for $400.  On June 1st, her account was debited for $457.  A fee of $57 for the two-week loan.
 

Now it was time to pay rent again and she was still short.  Jane borrowed $500 once more and on June 15th, paid another $67 fee. Though she had good intentions, Jane needed some help again and took out another $400.  The loan was repaid on June 29th and she paid another fee of $57.
 

In two months, Jane paid fees totaling $248!!  If she continued to do these loans for a year, she could pay $1,488 in fees to the payday lender.  And, her average loan was only $450.

 

The Problem with Payday Loans

Here is the problem with payday loans.  How long will it take before a person can actually pay back the loan?  Where does it end?  How does a person get out of the payday loan trap.  This example is not all that unusual.   
 

Financial Health FCU has a program aimed at helping members break the expensive and destructive cycle of payday lending.  We DO NOT make payday loans. What we do is help members payoff payday loans at reasonable terms.  We call these loans Payday Alternative Loans (PAL).  
 
If Jane had come to us when she knew she could not repay the first payday loan, we could have made her a loan of $567.  At a 23% annual percentage rate of interest, her payment would have been $46 every two weeks for six months and the finance charge would have been $45.64 (including the $10 application fee).  Less than she would have paid the payday lender for a two week loan!! The big difference is that the borrower pays us back a little bit at a time with an affordable payment and a reasonable finance charge. 
 

To repeat, we do not make payday loans.  This program is designed to help members get out of the payday loan trap.  Here are other guidelines for this program. 
 

ELIGIBILITY FOR PAL LOANS:

  • Membership Requirement: 6 months
  • 100% direct deposit required
  • Debt ratio not to exceed 75%
  • Members receiving PALs must enroll in checking account seminar
  • Application fee of $10 to all applicants
  • Annual percentage rate of 28% (23% for members choosing payroll deduction)
  • All loans will have biweekly payments.
     

Call us at 963-1199 for more information or to apply for a PAL or other small personal loans for any purpose.