Payday loans a poor choice for those with financial challenges

In this struggling economy, many Floridians will resort to payday loans as a way to help them take care of unpaid bills and other expenses. Whether online or in-store, a payday loan might seem at first glance to be a quick and easy way to get some debt relief, but many consumers don’t realize the problems that a payday loan can cause. Astronomical interest rates and a vicious lending cycle are the most common complaints stemming from payday loans in a recent report by Pew Charitable Trusts.

According to the report, about 12 million consumers take out payday loans each year in the U.S. The average 2-week loan is around $375. If most people could afford repaying the loan after that 2-week period, then the service fee might not seem so bad. However, payday loans usually trap the consumer into a debt cycle that takes an average of five months to repay. This results in an annual interest rate of around 400 percent for these types of loans.

About half of those surveyed by Pew who borrowed from online payday lenders reported their bank accounts being overdrawn when the lender automatically withdrew the loan. Many consumers will then turn around and borrow more money to repay the previous loan and cover their upcoming expenses, thus feeding the cycle of debt.

Some financial advisors say credit card debt is preferable to the payday loan debt cycle. It would be better in most cases to view payday loans as a last resort, and borrow money from family or cut expenses in an attempt to make ends meet. Other options are available that can keep people from going further into debt, including filing for bankruptcy.

Source: US News, “4 Payday Loan Myths,” JP, Mar. 8, 2013