Payday loans are an alternative finance source for those running short of cash. They work like a two-week advance on your paycheck. But while they can appear as a short-term solution to going broke, they can have serious long-terms effects. Consider the following example.
Raymond Chaney, a senior citizen from Boise acquired a payday loan in November 2013 to pay $400 in car damages. But when he couldn’t pay back in two weeks, he renewed it, and in Chaney’s own words, he “did a dumb thing”.
Soon, he was in a debt trap (to interpolate a macro-economic term), taking several payday loans from internet-based lenders. Failure to keep up with repayments forced him to evacuate his residence and also lose his Social Security savings, which was his sole source of income.
If you think that this is a rare scenario in the U.S., you should expose yourself to some stats. About 12 million Americans in need of instant finance turn to these short-term (but high interest) solutions, simply because they can’t resort to loans or credit cards.
The shocking thing is that more than 80% of these borrowers acquire more than a dozen loans, a predicament that in Chaney’s case leaves you homeless (he owed $12,000 on a $3,000 borrowing).
The authorities are well aware of the inherent dangers involved in this type of financing, and some states have simple outlawed payday loans. Recently, celebrity Kerry Katona starred in a payday loan company advert where the message was to lead a celebrity lifestyle by borrowing cash!
While a previous ad featuring the same celebrity was banned, the Advertising Standards Authority (ASA) rightly noted that banning is not a solution. Indeed, until serious efforts are not made to resolve America’s vulnerable consumer culture, we will see a lot more Chaney’s on our streets because they paid heed to some irresponsible ads by reality-show celebrities.
What we can take away from it? If you need money for the short term, be sure to pay it back on time. Payday loans and credit cards are not a solution for a gambling problem. Be aware of the risks and only use them when you really need them and can be sure to pay them off on time. If we handle them with responsibility, payday loans can be a lifesaver.