Payday loans have the highest interest rates of any type of loan. A report by the Consumer Financial Protection Bureau stated that 64% of new borrowers will renew their payday loans. They have also concluded that more than 80% of borrowers do not show a decrease in principal amount owed when loans are renewed. Put simply payday loans create a cycle of debt that only forces consumers to continue borrowing.
How Do Payday Loans Work?
Lenders make money by charging customers a fee to borrow a certain amount. For example, you need to borrow $100. If the fee for borrowing $100 is $25, you would write a check to the lender for $125 dated for your next payday. If you don’t have the funds to pay the lender $125 by your next payday you can extend the loan by another pay period. More than half of the people who take out payday loans extend or roll over that loan. Extending the loan results in an additional fee of $25. Consequently, the initial cost of borrowing $100 has gone from $25 to $50. If you were to extend this loan 3 times the cost of borrowing that $100 has jumped to $100. In order to repay your debt you must now pay $200 to the lender.
Who Uses Payday Loans?
Many people who use payday loans are living paycheck to paycheck. Unexpected expenses cause people to seek out payday loans in order to avoid borrowing money from friends or family. These same people commonly don’t have good enough credit for other lenders such as banks and credit unions to offer them a loan. Consequently, they turn to cash advances on payday loans to make ends meet. Unfortunately those that utilize these companies end up in a recurring cycle of debt.
There are alternatives to payday loans. Usually local banks and smaller loan companies will be more forthcoming with lending than corporate chains. Most people want to avoid turning to family and friends for financial support. However, in comparison to payday loans it is a much better alternative. In the end those with payday loans will usually turn to family as a last resort in order to get out of the cycle of borrowing caused by the initial payday loan. Another option is to search for local government programs. Idaho offers temporary assistance programs that you can search and apply for here.
Idaho’s Payday Loan Regulations
Despite Idaho’s astronomical interest rates for payday loans there are regulations in place to help protect consumers. The Idaho Department of Finance prevents consumers from renewing a payday loan more than 3 times. They also prevent new payday loans being offered to those that have an outstanding balance of $1,000 or 25% of their gross monthly income, whichever is less. Consumers also have a one time opportunity in a twelve month period to convert a payday loan into an extended payment plan with no added penalties.
End The Cycle
If you have found yourself in a difficult financial situation remember that you have options:
- Seek loans from local banks and credit unions.
- Try smaller loan companies instead.
- Search for local government programs.
- Reach out to friends and family for help.
Educating yourself about these types of loans is the best way to protect yourself from them. If you are struggling to pay back a payday loan do whatever you can to avoid renewing that loan. Be sure to call your loan officer before the loan defaults and ask for the extended payment plan option. Idaho also offers a consumer affairs response program for those who would like to file a complaint against a licensed lender for violating any regulations in place by the state.