You need money to pay a big bill, and you don’t have it. What are you doing?
Many Americans are turning to payday loans to fill this gap, even though the interest rates are staggering – an average of nearly 400% APR.
A recent survey of CNBC Make It and Morning Consult found that all generations use payday loans. While 11% of all Americans have taken out a payday loan in the past two years, Millennials (22 to 37) and Gen Xers (38 to 53) rely the most on payday loans. Thirteen percent of both generations have taken out payday loans in the past two years, compared to 8% of Gen Z (18 to 21) and 7% of baby boomers (54 to 72).
A worrying percentage of young Americans have at least considered the idea. More than half of millennials (51%) have considered a payday loan, which is not surprising given that many millennials came of age during the housing crisis and the recession that followed. The most common reason given was to cover basic expenses like rent, utilities and groceries.
However, 38% of Gen Z have also considered taking out a personal loan. Their reasons were mainly associated with the costs of college education (11%).
Older generations see the downsides of payday loans – or maybe they experienced those downsides when they were younger. Only 16% of Gen Xers have considered a payday loan, while only 7% of Baby Boomers have. (Essentially, all Baby Boomers are desperate enough to consider a follow-up payday loan.)
What are the disadvantages of a personal loan? Interest rates are a huge drawback. Payday loans are relatively small loans paid over a short period of time, and to hide the impact, repayment is usually expressed in dollars. For example, a loan of $ 100 over two weeks may come with a finance charge of $ 75. Sounds reasonable – until you realize the finance charge is about 1950% APR.
Lenders often renew the loan for those who cannot pay, which makes the problem even worse. According to the Consumer Financial Protection Bureau (CFPB), nearly 25% of payday loan borrowers re-borrow at least nine times. The Pew Research Center found that an average payday loan borrower took out eight loans of $ 375 each per year and paid $ 520 in interest as a result.
Contrary to a popular myth, payday loans will not improve your credit score if you pay them off on time. Payday lenders do not share payment information with credit bureaus. However, a payday loan could actually hurt your credit score if your loan goes into collection. You can check your credit score and read your credit report for free in minutes by join MoneyTips.
If you decide to apply for a payday loan, you probably won’t have much trouble finding one. There are approximately 23,000 payday lenders in the United States – although some states prohibit the practice and others limit the effect of payday loans by setting usury limits or interest rate caps. The Consumer Federation of America provides details of each state’s payday loan policies on their website.
The CFPB issued rules for payday loan regulations to take effect in August 2019 – but there is no guarantee of follow-up.
Even in states with regulatory limits, a payday loan should be a last resort. To consider alternatives like negotiating payment schedules with creditors, borrowing from friends or family, getting an advance from your employer, or taking out a small personal loan. If you are interested in a personal loan, visit our list of the best lenders.
Better yet, devote enough surpluses to your budget to create an emergency fund for future financial crises. You won’t have to worry about any loan repayment.
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