Americans try and manage bills every day, week and month of the year. However, sometimes the budgeting falls apart. Americans can't make it. A gleaming neon light on main street America suggests a quick fix.
The dark world of payday loans has got a grip on Americans. In California alone, there are more centers to get a loan based on your next paycheck than there are McDonald's restaurants. A number of factors contribute to this rising trend. People with no savings, credit cards or other financial resources often find themselves tempted by these online and retail centers.
By simply providing a post dated check with a fee attached, clients receive a quick influx of cash. However, the fee can be as much as $100. The average payday loan comes with a whopping interest rate of 396%.
This starts a vicious cycle that involves desperation and temptation. A CNN Money article interviewed a client who said, "You get a payday loan and you take your pay next payday and pay back the loan. Then you don't have enough money to last to the next payday, so you go back. If you don't pay the loan, they call everybody from your employer to your sister."
The client is desperate to get money, so then they are tempted to give $100 for a cash advance on money they don't have yet. Then when they can't pay the loan agency is desperate to get their money, therefore tempted to make the life of their client difficult. A real no win situation.
Jim Rokakis, the treasurer of Cuyahoga County in Ohio, says there are more "payday lending shops in the state than McDonalds, Burger Kings and Wendy's restaurants combined." Bill Faith, a leader of the Ohio Coalition for Responsible Lending, suggests that loan sharks are cheaper than the payday industry. Faith says, "In Ohio, the number of lender locations jumped from 107 in 1996 to 1,562 10 years later." This sharp trend is an equal opportunity exploiter, from the single mother with mouths to feed to homeowners near default.
All are in line for a quick fix that could turn into a long term and expensive loan arrangement. One Ohio Coalition leader suggests that, "most loans are rolled over 10, 12 or 13 times. That's the business model even though the industry says it's not." A Consumer of Federation report says, "A $100 loan with a $15 fee every two weeks costs 391% APR. This loan, rolled-over three times, costs $60 to borrow $100 for 56 days for the same 391% APR."
There are no easy answers for this condition of financial dependency. Advertising works and people see payday loans as a viable solution, despite the expense and potential long term costs.
Chartered life underwriter and financial consultant Kent Schiner says, "People are lacking proper planning, both short and long term." Certified in long-term care, Schiner helps clients build security for their family and wealth accumulations for college, retirement and inheritance.
A financial adviser for 50 years, Mr. Schiner recommends people follow these guidelines and insights into avoiding the payday loan trap:
1. People have to learn to live lower than their income. It should be a ritual to put away a certain amount of money into a bank account each week. After a few months, he/she has built up a reserve. The key is not to spend the reserve. Advertising works and makes people want to buy something they may not need.
2. Pay yourself first before you pay anyone else. Before you pay bills, put aside 10% into a savings account in order to build your reserve. This will avoid the $100 payday loan fee and the interest from the savings account can build financial security.
3. Parents can purchase life insurance in the event of a family demise. The surviving spouse then has resources to maintain the family's standard of living. Monies received from insurance can be used to help fund children's education.
4. What would be helpful is community activism that can educate the black community to be more aware of banking alternatives that avoid payday loans. The National Urban League, NAACP, churches, and community centers have an opportunity to educate otherwise un-informed individuals not only the effectiveness of banking relations and on the matter of finances.
5. Banks, commercial and credit unions, need to actively create programs that will offer programs that consider the time sensitive cashing needs of customers who have given into payday loans. Most banks, like Bank of America and M&T Bank, take 2 days to clear in-state payroll checks and 5 days for out-of-state checks. When paychecks can't be cashed in a timely way, payday loans and their enticing cash become a reality. However, People's Bank of Maryland makes $100 available for withdrawal the next business day with in-state payroll deposit checks.
Along with understanding how to manage finances better, a bank account increases consumers earning capacity so that they would never have to consider a payday loan. The bottom line is payday loans create more of a liability than an asset. If only everyday Americans knew this.
