Why Are Payday Loans So Popular? Solutions to Break the Cycle
- Published on -
- Written By - Alex Hales
- Reviewed By - Zack M. Disette
Around $637 billion dollars were lost in loans in America within the last year. Despite their predatory nature, payday loans remain popular in America, forcing 12 million people every year into a debt trap. In this article, we will look closer at the the reasons behind their appeal as well as strategies, solutions, and success stories of people overcoming these loans.
1. The Appeal of Getting Cash Quickly
Why It’s Popular:
Payday loans are perfect for a quick solution because they deposit cash often within hours. Such loans have shattered the limit of traditional loans as they have no competition, especially with people of low credit score. Whether it be an emergency car repair or a medical bill that requires urgent attention, these loans are saviors for many.
Solution: Build Emergency Savings & Explore Alternatives
Example: PALs (Payday Alternative Loans)- Federally insured credit unions can offer member up to $2000 with an APR limit of 28%. These loans are granted after a member has been in the union for a month.
Tip: Save automatically using savings apps such as Digit or Quapital. Save $20/week and in a year, you will have $1040 without resorting to manual saving.
Case Study: A single mother named Maria avoided a $500 payday loan by using PALs. She was able to pay it off in $500 payments, saving over $400 in fees.
2. Basic Requirements for Eligibility
Why It’s Popular:
All that is needed to apply is an ID, paycheck, and a bank account, making these loans available to almost everyone. The absence of credit checks and need for collateral ensure that every working American has access.
Solution: Improve Credit Accessibly
Example: SelfHelp Credit Union gives out secure credit cards with a minimal deposit of $200 and use of payments to build Self Help Credit Union offers secured credit cards with a $200 deposit, reporting payments to bureaus to build credit.
Tip: Use Annualcreditreport.com to check for credit report errors and take steps to correct them. One correction can increase your credit score by over fifty points.
Case Study: John qualified for a personal loan at 15% APR after repairing his credit, which is much more manageable than the 400% payday loan.
3. Lack of Financial Literacy
Why It’s Popular:
Many people fail to digest the true consequences of borrowing money. A 500 loan with a 75 dollar fee seems approachable, but the 391% APR is rarely heard of.
Solution: Emphasis on Financial Education
Example: Nonprofit organization Money Management International conduct budget and debt management workshops free of charge.
Tip: Take advantage of free Khan Academy and Coursera coursework on budgeting and interest rates.
Case Study: Sarah attended the workshop and was able to build a budget with a 0% APR credit card that she kept for emergency use only.
4. Aggressive Marketing Tactics
Why It’s Popular:
Payday lenders notoriously advertise “easy cash” branded services to enticing low-income neighborhoods without advertising the risk involved.
Solution: Advocacy and Regulation at the Community Level
Example: The use of payday loans dropped by 40% after their advertisement was prohibited within city limits in Cleveland, Ohio.
Tip: Before borrowing money, check the lender using the complaint database on the CFPB website.
Case Study: A Denver community group outreach reduced the use of payday loans by educating residents on PALs.
5. The Cycle of Debt
Why It’s Popular:
80% of payday loans are rolled over and borrowers keep taking out loans ever so frequently.
Solution: Debt Management Plans (DMP)
Example: The NFCC intervenes and puts together an interest reduction as an incentive along with debt consolidation.
Tip: Inquire with lenders regarding an Extended Payment Plan (EPP)—in several states, this is an obligated option without charge.
Case Study: David entered into a DMP and paid back a $3000 payday debt over a two-year term instead of five years.
Conclusion: Breaking Free from the Trap
There is an existing solution for the desperation and systemic gaps offered by payday loans like building emergency funds, improving credit, leveraging education, and advocacy. Share this information because financial freedom is not something that should be fought over but a right that every single individual is entitled to.
Final Tip: Make sure you act now. Take ten dollars to open a savings account, find out what your credit score is, and spread this article around. Change comes from taking this small steps which leads to a bigger outcome.
