Payday loans are the absolute worst.

Unfortunately, it’s usually the poor that end up needing to use them and, once you start, it’s easy to fall into a terrible cycle of debt.

I have some second-hand experience with payday loans.

My boyfriend, now husband, moved to a new city to go back to school. With moving costs, rent, tuition, a new computer etc. he quickly burned through his savings.

He had taken out a small student loan to help him get through school but in an expensive city, it wasn’t enough. So, in an effort to try and make ends meet he turned to payday loans.

Nooooooooooooooooooo.

His first encounter with a payday loan happened about a year before I met him.

I would like to say that if we had been dating at this time he never would have gotten into this vial habit BUT, that is not true.

When we started dating I wasn’t all up in his financial business (oh how things have changed!) AND, at this time I had no idea what a payday loan even was.

It wasn’t until I saw one of his receipts that I learned about this horrible scam called payday loans.

What is a payday loan?

For those of you who are unaware of payday loans, let me enlighten you for just a moment.

As the title suggests, a “payday loan” is a short-term, high interest loan that is supposed to float you until payday.

People usually turn to a payday loan when they need money fast. You can generally get one within a 24 hour period. I’m not going to give you the criteria for getting a payday loan because you shouldn’t do it.

The loans are usually for a couple hundred  to a thousand dollars…just enough to get someone by until they get paid. Then, you are supposed to payback the loan as soon as you get your next pay cheque.

Can you see how this can easily turn into a cycle of debt?

You take out a payday loan because your paycheck isn’t enough to get you through the 2-week or monthly period.

Then, you have to payback the loan (with fees and interest) as soon as you get your next pay cheque. Meaning, this time your pay cheque, the same one that couldn’t cover your bills in the first place, is now reduced even more.

So now in order to make ends meet you need to take out an even larger payday loan………and so the cycle continues.

And, what happens if you don’t have enough money to pay back the loan. MORE INTEREST and MORE FEES.

The Government of Canada website offers a good example of the sky-high interest fees associated with a payday loan. It also offers some great infographics and additional facts on these loans.

Say you take out a $300.00 loan for 14 days. This is how much interest you will pay with depending on where you borrow the money from:

• Line of Credit   $5.81
• Overdraft Protection on Your Bank Account  $7.19
• Credit Card Cash Advance   $7.42
• Payday loan  $63.00

Ummmmm, what?

Yes, $63.00. For a 14 day loan of $300.00. This is sheer madness.

Here are a few more shocking statistics from the same Government of Canada site.

• A payday loan costs $21 per $100 that you borrow, which is the same as an annual interest rate of 546%
• If you are unable to pay back the payday loan on time the lender can can your friends, family or even your employer to collect their money…this might be a tad embarrassing.

After hearing these facts I hope you are not currently considering a payday loan.

However, if you are in absolute dire straights try to ensure that you only use this money for essentials (mortgage payment, heat etc.) do not use this money for beer or to pay your cable bill. AND, try your damnedest to pay it back in full on time.

How to avoid a payday loan

I get it, no one wants to take out a payday loan but sometimes there’s an emergency situation and it’s a last resort. So, let’s be proactive. Let’s set ourselves up for a future where we don’t need to turn to payday loans because we have covered our financial basis.

1. Make a budget. I preach this almost weekly. It does not have to be complicated. Check out this article for some additional tips on budgeting.
2. Start and emergency fund. This is a perfect example of why an emergency fund is so important. You want to have some back up money to help get you by so you NEVER have to take out a payday loan.
3. Make more money. Seriously, take a second job to avoid a payday loan. Easier said then done, I get it. But, if you are able, start babysitting, dog-sitting, house sitting, drive Uber, serve…do what you need to do to fill in the financial gaps. It will suck right now but trust me, your future self will thank you. (BONUS: If you are always working guess what you aren’t doing……? Spending money!)
4. Cut your costs. Rent payments too high? Look for a smaller apartment. Car payments to expensive? Sell your car and take public transit. Grocery bills sky-high? Eat canned beans for a month. Do what you need to do to scrape by and save a bit extra…especially if you are young. If you have family I understand this can be a bit more difficult but there are always changes that can be made. For some easy and actionable tips check out this article here.
5. Borrow money from anywhere else. I understand most people using a payday loan are doing it as a last resort. So, you probably aren’t in a position to borrow from a bank. In this case I think it’s worth asking your friends or family for a short-term loan BUT, and this is a BIG OL’ BUT, only if you are 100% confident that you can pay it back within a predetermined and agreed upon timeline and IN FULL. I can’t even believe I am writing this because I totally don’t believe in mixing money with friendship and family. However, the interest charged to a payday loan is so totally terrible that I am making an exception.

I want to hear from you!

• Have you ever had to use a payday loan?
• Were you able to pay it back in full or did you spiral into a cycle of more and more debt?
• Do you have any other tips to help others avoid using a payday loan?

References

Post Photo by Michael Longmire on Unsplash