Payday loans, or cash advances, are used by twelve million Americans each year, according to a recent study by the Center for Financial Services Innovation. Payday loans are frequently used to cover necessary living expenses such as water, gas, and electric bills, along with rent and car payments. The loans work like this: you go into a lender and exchange for cash you give the lender your banking information and allow them to withdraw the loan and finance charge on the next payday.
If the person is unable to pay the full amount (loan plus finance charge) then the individual has the option of only paying the finance charge. In Michigan, the finance charge is limited to 15% on the first $100, 14% on the second $100, 13% on the third $100, 12% on the fourth $100, and 11% on the fifth and sixth $100.
Why payday loans and cash advances are a terrible idea:
The Interest rate makes them unaffordable
In Michigan, the finance charge on the payday loan is astronomical. Although the numbers above don’t look astronomical, you have to remember that these rates are for a two-week loan period. The interest charge on a $100.00 loan is $15.00. The daily interest charged ($15/14) is $1.071429. If this is converted into an annual percentage rate (APR) it is: $1.071429 x 365 days in a year = 391%.
Most borrowers pay more in fees than they received in credit
So, typically the person takes out a payday loan of $600.00 the total finance charge is $76.00. If the person only pays the $76.00 on their next payday, the loan and finance charge will roll over to the following pay period. This can go on until the loan and finance charge are paid in full. The average individual typically takes five months to pay off the loan and finance charge. This means the average person will end up paying over $700.00 on a loan of only $600. THE PERSON WILL PAY MORE IN FEES THAN THEY RECEIVE IN CREDIT.
Now, if the customer does not pay the finance charge then the lender can withdraw the funds from the person’s bank account. If there are insufficient funds to cover the loan and finance amount there will be additional charges. Your bank will charge you for the non-sufficient funds check and the payday lender can charge an additional $25 for a returned check fee. These two fees will be on top of the balance owed in the original loan agreement.
Cash Advances may not be Discharged in Bankruptcy
If you take out a payday loan, or cash advance, prior to filing for bankruptcy it may also be an issue. If the cash advances total more than $925 within the 70 days prior to filing for bankruptcy, the amount is not dischargeable in the bankruptcy. This amount needs to be taken from one cash advance place, not multiple.
If you are unable to make ends meet temporarily, there are alternatives. First, you should ask the creditor for more time to pay your bills. Then, before taking one of the following alternatives, you should speak with an attorney to discuss your legal options.
Lastly, before taking out a payday loan, you should consider a loan from a friend, family member, bank, or credit union. You could also ask for advance pay from your employer.
The bottom line is that payday loans are almost always a terrible idea and should be avoided at all costs.
For more information about pay day loans or help discharging them in bankruptcy, please contact our office at 248-237-7979.