Confessions of a Former Payday Loan Junkie
Can you say “Cash in a Flash?” That’s all I was concerned about when I began financial suicide using payday loans 9 years ago. I have since learned some very important lessons on why they are usually a very unnecessary evil.
How it all got started. I was young, but not really that dumb when I took out my first payday loan at age 20. I had ran into a small but unexpected medical bill, that put me a month behind on my electricity. Rather than pay the whopping $40 late fee and risk looking dumb to my utility company, I considered all of my options. I had room for a cash advance on my credit card, but there was a $5 minimum fee, plus an amazing 29.99% interest rate. Crunching the numbers in my head, I incorrectly fell for the thinking that a payday loan would be cheaper, easier, and less intrusive on my finances. After all, look how happy those people were in the commercials!
My first loan. I couldn’t believe how easy it was to get that first $200. I brought in one pay stub and my driver’s license, and after filling out a very simple one-page form, I was eligible for a cash loan up to $400. Resisting the temptation (and the teller’s urgings) to borrow the full amount, I wrote a check for $230, and the teller handed me $200. (For those of you doing the math, I paid $30 to borrow $200. The interest rate chart that they showed me confirmed my calculations that I was paying a 15% interest rate. What I didn’t figure into the equation was that it was only for a 2-week period!)
Time to repay. The two weeks came and went very quickly. I was due to repay the loan to the cash advance outlet. They had given me to options: I could repay the loan with cash, and I would receive my check back uncashed, or I could let the check go through. I was already in trouble because I didn’t receive the bonus on my paycheck I was expecting. I didn’t have the money to pay back the loan. By letting the check go through to my bank, I was looking at $39 in overdraft fees and $39 in bounced check fees to the check cashing outlet. If I could just get $230 for a few hours, I could buy back my check, and write a new one for an additional two-week loan. (Costing me another $30 to do so, of course.)
Plenty of cash in the sea. Knowing that cash advance outlets were more plentiful in my part of town than gas stations, I just hit up another outlet. It was easy to write out another loan, for a slightly higher amount, to cover my loan at the first outlet. I was certain that I would never have to do this again, so I justified it.
No lunch for you! Because I got stiffed on my quarterly bonus, and my finances never got any better, my endless cycle of payday loans grew over time. By the time 2 months had gone by, I had opened accounts at 4 different payday loan outlets. I was borrowing a total of $900 every two weeks, with a cost of $135! I don’t even want to think of the total amount of hard-earned money I was throwing away. The worst part of the situation was the shame involved. I was always so good with my money, I was afraid to ask for help, and I had no idea how I could legitimately get more money to get out of this large financial pit I was sinking into. (I also was spending 3 hours on the due date of my loans to drive all over town “robbing Peter to pay Paul.” I was missing my lunch breaks at work and taking off early to get things done. I was living a horrible financial lie.)
Problem solved? I wish I could say that some financial angel came down from the heavens and rescued me from my stupidity cycle. It wasn’t until I did the math on all my loans and calculated that each loan had an annual percentage rate of 390% that I realized the original error of my ways. I took out that credit card cash advance that I had shrugged off earlier in the year. I paid the measly $5 minimum fee, took almost $1000, and paid off all my payday loans. I then humbly approached my boss and asked if there were any special projects or work I could do to earn even a small increase or bonus on my next check.
In the end, it all worked out. I paid off my credit card within 6 months. It wasn’t ideal, but it saved me a ton in the long run. And because I had reached my cash limit, there was no way to increase my existing cash debt with that particular card beyond what I had already acquired. Looking back, I would have just sucked it up and asked a relative for some cash, sold some of my DVD’s on Ebay, or picked up a night shift waiting tables somewhere. All of that seemed like so much work, and I fell into the lie of “quick and easy cash loans.”
There are all kinds of variations on the payday loan. Title loans, pawn shops, and internet-offered delayed check cashing services all fall into the same scammy category. For more information from professionals on why payday loans are bad news for consumers, check out the Federal Trade Commission’s Consumer Alert. And remember the rule when it comes to payday loans:
“If you don’t have the money now, you will NOT be likely to have it in two weeks.”