Every day people are devastated by the debt trap of payday loans. Their stories are amazingly consistent. They go to payday lenders out of a short-term need for cash and end up caught for months, even years, paying big fees for small loans without being able to pay them off once and for all. Driven by the fear of bounced checks or by the false threat of prosecution, payday borrowers are forced to pay the loan fees before they pay basic living expenses—like rent, mortgage, electricity... even groceries.
Here are some of their stories:
"At the time it seems like the way out, but this is not a quick fix. It’s like a ton of bricks." Sandra Harris, once a Head Start student, now a well-known and respected member of her community, worked diligently to keep up with her bills. In a tough time, she turned to payday lending. After several rollovers, Sandra’s first loan was due in full. She couldn’t pay it off, so she took a loan from a second lender. Frantically trying to manage her bills, Sandra eventually found herself with six simultaneous payday loans. She was paying over $600 per month in fees, none of which was applied to her debt. Sandra was evicted and her car was repossessed.
"As soon as you get your first loan, you are trapped unless you know you will have the 300 extra dollars in the next two weeks." Lisa Engelkins, a single mother making less than $8 an hour, paid $1254 in fees to renew a payday loan 35 times. Lisa thought she was getting “new money” each time, when in fact she was simply borrowing back the $300 she just repaid. She paid renewal fees every two weeks for 17 months to float a $300 loan, without paying down the loan.
"I felt like I was in a stranglehold each payday. After awhile, I thought, 'I'm never going to get off this merry-go-round.' I wish I’d never gotten these loans."
Anita Monti went to an Advance America payday lending store in hopes of finding a solution to a common problem -- how to delight her grandkids on Christmas. Her response to the payday company’s offers of help ended up costing her nearly $2000 and many months of emotional turmoil.
"I needed the cash to get through the week. It didn't cross my mind that I was borrowing back my own money."
Arthur Jackson,* a warehouse worker and grandfather of seven, went to the same Advance America payday shop for over five years. His total interest paid is estimated at about $5,000 -- for a loan that started at $200 and eventually increased to a principal of $300. Advance America flipped the loan for Arthur over a hundred times, collecting interest of up to $52.50 for each transaction, while extending him no new money. His annual interest rate was in the triple digits. Arthur fell behind on his mortgage and filed bankruptcy to save his home.
"In five months, I spent about $7,000 in interest, and didn't even pay on the principal $1,900. I was having marital problems because of money and didn't know what to do for Christmas for my kid." Jason Withrow, as quoted in a December 2003 account by Russ Bynum of the Associated Press.
Petty Officer 2nd Class Jason Withrow injured his back and lost his second job as a result of a car accident in July of 2003. During a rough patch, the Navy nuclear submariner took out a payday loan. He ended up going to multiple lenders -- for seven loans all told -- to pay the repeated interest fees on his initial advance. Jason’s initial loan was for $300.
After her husband was laid off, Pamela Gomez* borrowed $500 from a payday lender. But the Phoenix, Arizona woman found that she, like many other borrowers, could not manage to repay the $588 she owed ($500 plus $88 in fees) when it was due in two weeks. She went to a second lender to pay the first, and a third to pay the second, getting in deeper until she had five loans of $500. She was paying $880 every month in payday fees, never paying down the principal owed. By June of 2004, she had paid $10,560 in interest on these five loans. She was afraid of going to jail if she stopped paying the fees, and had no idea how to get out of the trap.
Clarissa Farrar and her 15-year-old son put in more sweat equity hours than required on their Habitat for Humanity house, in joyful anticipation of living in their own home. Clarissa works full time, but receives no child support and struggles to manage her expenses. At times she has worked a second part-time job, but when the company she worked for shut down, Clarissa thought payday loans might ease her way. But eventually Clarissa couldn’t repay a loan, and the payday company deposited the check they were holding as collateral. The check bounced and both her bank and the payday lender charged her additional fees for insufficient funds. Now Clarissa’s hopes for a Habitat house are dimmed.
Kym Johnson, a single mother working as a temp in the Triangle area, took out a payday loan when a friend told her about how she could borrow money until her next payday. She quickly fell into the debt trap, and had to pay a high fee every payday to renew the loan and avoid default. When she had trouble keeping up this cycle, she took out a second loan to pay fees on the first. She paid on both loans for about a year, finally convincing one of the lenders to let her pay off the loan in increments. It took Kym another eight months to shake free from the debt trap.
At the most trying time during her experience with payday lending, Wanda Thompson* of Florida owed nine different payday lenders. Every payday, she spent her lunch hour shuffling between lenders to pay fees and keep herself afloat. She quickly fell behind on her car payment and other basic expenses while trying to avoid defaulting on the payday loans. One of the lenders threatened to revoke Wanda’s driver’s license when she could no longer make payments. Wanda finally sought legal advice and pulled herself out of debt, but not until she had stopped payment on some checks and paid bounced check fees on others.
As a grad student in North Carolina’s Triangle area, Allen King* found it very difficult to pay off the four payday loans he had accumulated, since the lenders did not offer installment plans. When he did manage to pay off one or two of the loans, he soon found himself strapped for cash and forced to renew the loan.
Allen finally sought help from a credit counselor. He sent letters to the payday lenders asking for a payment plan he could afford. But instead of helping him work out payments, one of the lenders deposited his check upon receiving his letter, and it bounced twice before he could cancel the check. Two other lenders were internet-based companies who automatically drafted his checking account. He had to close his account to stop them. When one of these lenders received Allen’s payment plan letter, they called and threatened to send a sheriff to his house and serve him court papers. Allen now realizes he has technically repaid the debt several times over in rollover fees.
Rhonda Keller* and her two daughters experienced a financial crisis last summer that sent Rhonda looking for help from payday lenders. She found not the help she needed, but disaster. Rhonda fell into the payday lending debt trap - the terms of the loans she took out required her to either pay them off in less than two weeks or have $90 fees automatically debited from her bank account repeatedly. Those loans, at triple-digit APR, have cost her much more than the exorbitant fees. Her family’s finances are in ruins and she is planning to file bankruptcy.
Like many borrowers, Janis Brown* went to one payday lender to get help paying the fees of another. She ended up borrowing from three different lenders. Since she could not pay the loans in installments, she paid the repeat fees until she got her tax returns. When she couldn’t keep up with the fees one lender demanded, they called and left her a message saying that they would take her to court if her account was short. It was several months before Janis found her way out of the trap, and she needed help from social services during this time, once to pay her rent and twice to pay her light bill.
With retirement and disability income, Mary Hamilton*, a 62-year-old African-American mother and grandmother brings in about $1000 per month. She took out her first payday loan because she needed "a little extra" money to go out of town. Like many borrowers, she had to take out a second loan to pay off the first. She now has loans with four payday lenders. "When I get a little extra money, I'm going to pay them off and I'm through with them," said Mary. "It's a rip off. There's nothing cute about it. I'm supposed to get some money, but I lose money." The fees Mary has to pay to keep from defaulting on her payday loans add up to over 40 percent of her monthly income.
Sandy Hudson’s* first payday loan was for $100, with an $18 fee. She worked down the street from the payday shop, and since she was short on cash, she called to see what she needed to get a loan. All she needed was a source of income and a banking account, so she walked into the shop, and walked out 15 minutes later with the loan. Sandy got caught up in the payday lending debt trap, taking out multiple loans to pay the fees on each one as they became due. At one point, she was paying $300 every two weeks for four different loans. Over a six month period, this added up to $3600, but she was in the trap much longer, paying off one loan, then another, until she lost her job and could no longer keep up with the fees. She filed bankruptcy.
Whitney, who lives in Florida, was caught in the debt trap for nearly three years. During that time, she juggled ten payday lenders, spending her lunch hour going from one lender to the next rolling over the various loans. When she was on the brink of bankruptcy, several lenders bombarded her with threats of revoking her driver's license, turning her in to the Attorney General's office, and filing criminal charges.
Betty, a senior citizen in Durham, North Carolina, paid over half of her $564 monthly Social Security income in payday fees, never paying down her loans. She lost her phone and needed emergency help from social services to avoid eviction.
Edith, an Asheville, North Carolina single mother, cut down on her family’s groceries, stopped driving her car, and kept her lights off to save electricity as she scrambled to pay the fees on her payday loans.
Paula, who lives in Texas with her husband and 3 children, took out some payday loans through lenders on the Internet after her husband lost his job. After he started working again, they were never able to get out of the debt trap due to excessive rollover fees. At one point, $800 a month of the family’s money was going towards payday loans.
Danny, a forklift operator from Kannapolis, NC, paid more than $5,000 in fees to payday lenders over two years. He has over 170 check stubs from payments made to these lenders.
Melissa has had as many as seven payday loans going at the same time. She has recently paid $346 every two weeks in fees alone to carry the payday loans. This New Mexico resident has tried to make payment arrangements with the lenders, but they refuse to work with her.
A Greensboro, NC woman lost her opportunity to buy a Habitat for Humanity home because of her payday debts.
Tennessee resident Natalie has paid over $4000 in fees for $800 worth of loans. Each time that she thinks she is has paid down the principal the lender informs her of more fees that have been piled onto her already steep debt. Additional fees are added every time that she pays late.
Kathy, a North Carolina state employee for 19 years, lost heat and electric service and now works two jobs to pay her payday fees.
Tara, a California woman, took out a payday loan to pay for medicine that her daughter needed. After taking out one loan, Tara had to take out a second to pay off the first. Finally, she had to take another job to pay back the loans.
Maria took out one payday loan three years ago. Now, she is struggling to handle five payday loans and is over $3000 in debt. Most of her budget goes to paying fees to rollover her loans, leaving little money for her to live on the rest of the month. She cannot afford to pay them off.
Karen, a Maryland resident, has paid nearly $2500 for $1000 worth of payday loans. One lender alone has collected $900 for a $250 loan.
*Name changed to protect the borrower's privacy.
Payday loans are designed to trap borrowers in debt. Due to the short term, most borrowers cannot afford to both repay the loan and pay their other important expenses.What is the problem with payday lenders? ›
Due to high fees and short terms, borrowers often can't repay on time and have to keep rolling over or taking out new payday loans to cover the last. According to the CFPB, more than 4 in 5 payday loans are reborrowed, with nearly 1 in 4 being reborrowed nine or more times.What is the biggest problem with payday lenders? ›
The biggest downfall to a payday loan is that a majority of time, consumers are already short in their budget, which is why they got a payday loan in the first place. Then, it becomes hard to accumulate those funds to pay off the loan, so many people get stuck in the payday lending cycle.Why is it important to avoid payday loans? ›
Relying on Fast Cash Can Lead to a Debt Cycle
Because of the high fees and interest rate, it's easy to get caught in a repeat cycle of rolling over the loan for another two weeks, or taking out another payday loan in order to pay off old loans.
Borrowers should beware of these loans. They may be considered predatory lending, as they have extremely high interest, don't consider a borrower's ability to repay, and have hidden provisions that charge borrowers added fees. 1 As a result, they can create a debt trap for consumers.What makes payday loans difficult for customers to pay back? ›
Payday loans typically carry annual percentage rates of 300 to 500 percent and are due on the borrower's next payday (roughly two weeks later) in lump-sum payments that consume about a third of the average customer's paycheck, making the loans difficult to repay without borrowing again.Is using a payday lender a good idea? ›
Is a payday loan a good idea? In general, it's best to avoid payday loans and their sky-high APRs. As many payday lenders ask for access to your bank account, they make payment withdrawals even if it would overdraw your account. What's more, high fees and short repayment terms can trap you in a cycle of debt.What are the risks of payday and predatory lending? ›
Payday loans carry very low risk of loss, but lenders typically charge fees equal to 400% APR and higher. Seventy-five percent of payday customers are unable to repay their loan within two weeks and are forced to get a loan “rollover” at additional cost.What are some negative consequences to payday loans? ›
- High interest rates. ...
- Short repayment period. ...
- Increased prevalence of predatory lending. ...
- High likelihood of getting trapped in the debt cycle. ...
- No positive effect on credit. ...
- Targeted at communities of color. ...
- Lenders have bank account access. ...
- Chance of lawsuit for unpaid balance.
The interest rates are so high (over 300% on average) that people cannot pay off their loans while covering normal living expenses. The typical borrower is compelled to take out one loan after another, incurring new fees each time out. This is the debt trap.
The obvious danger of payday loans is that they can be incredibly expensive to pay off. Borrowers may end up paying more back than they would on other types of loans. Another risk of short-term borrowing is the way it may impact your finances from one month to the next.What is a payday loan and why is this considered high risk? ›
Payday loans — These are high-cost loans with a short loan term — you typically must repay them in full within two weeks, or by your next paycheck. These loans have fees that equate to exorbitant annual percentage rates (APRs) of about 400%, according to the Consumer Financial Protection Bureau.How do you deal with payday loans? ›
- Request a repayment plan from your lender.
- Use lower-interest debt to pay off a payday loan.
- Commit not to borrow any more.
- Pay extra on your payday loan.
- Consider debt settlement or bankruptcy.
Instead, payday lenders make most of their profits from borrowers who cannot pay off their loans, and instead renew them repeatedly, quickly paying more in fees than they originally borrowed. Borrowers who get five or more loans account for 91% of payday lender revenues.What is the truth about payday loans? ›
Payday loans are typically short-term, low-amount loans that are easy to apply for and typically come due on the applicant's next payday — hence the name “payday loan.” It sounds good in theory, but there's one big problem: The interest rate and fees make it nearly impossible to pay in a timely manner.What are two disadvantages of payday loans? ›
Reasons to Avoid Payday Loans
Payday Loans Are Very Expensive – High interest credit cards might charge borrowers an APR of 28 to 36%, but the average payday loan's APR is commonly 398%. Payday Loans Are Financial Quicksand – Many borrowers are unable to repay the loan in the typical two-week repayment period.
So, an advantage of getting an online payday loan is that it's affordable. These loans typically come with much lower interest rates than credit cards or other forms of borrowing money. This means you'll end up paying less over the life of the loan, making it a more economical choice overall.Who are the most common victims of predatory lending? ›
Choose Your Debt Amount
Predatory lenders typically target minorities, the poor, the elderly and the less educated. They also prey on people who need immediate cash for emergencies such as paying medical bills, making a home repair or car payment.
Report your experience to the Federal Trade Commission. It watches out for predatory lending scams and frauds. Call toll-free 1-877-FTC-HELP (382-4357), Write to Federal Trade Commission, CRC-240, Washington, D.C. 20580.How do you prove predatory lending? ›
- 3-digit interest rates. One of the biggest warning signs of predatory lending is high, three-digit interest rates. ...
- Add-on loan services and costs. ...
- Fees or charges for low (or no) credit scores. ...
- High-risk secured lending. ...
- Rushed approval or paperwork. ...
- Loan flipping. ...
- Lying to you (or asking you to lie)
If you don't repay your payday loan, the payday lender or a debt collector generally can sue you to collect the money you owe. If they win, or if you do not dispute the lawsuit or claim, the court will enter an order or judgment against you. The order or judgment will state the amount of money you owe.What happens if you dont repay payday loans? ›
Payday loans come with exorbitant interest rates and fees that often make them very difficult to repay. If you can't pay back a payday loan, the account may be sent to a collection agency, which will damage your credit.Do payday loans exploit poor people? ›
Many payday lenders exploit cash-strapped people, often with limited access to other forms of credit, by offering them small, short-term and high-interest loans. Some borrowers have reported paying triple-digit interest rates, in some states over 600 percent, on their payday loans.How many payday loans can you have in a year? ›
The law doesn't prevent lenders from giving out multiple payday loans. Sometimes lenders won't give out a second loan if you already have one. The more loans you get, the higher the interest rate. And the more likely you are to fall into the payday loan trap.Can payday loans be written off? ›
To get rid of payday loan debt, you have a couple of options. The first option, as mentioned, is to try and write off what you owe. With an IVA, it's possible to write off substantial amounts while bringing your other debts under control. Your other option is to use a scheme called 'payday reclaim.How long do payday loans stay on your record? ›
But, just like any lender, payday lenders keep records and defaulted payday loans will remain on your credit report for six years. And this default gets reported and affects your credit score. If your credit is already less-than-perfect, defaulting on a payday loan could damage your credit history for several years.Why do so many people continue to use payday loans despite? ›
Why do so many people continue to use payday loans despite the financial risk? Payday loans usually come with much lower interest rates. Consumers need quick access to money that is not provided by other financial institutions. If paid back on time, payday loans can significantly increase your credit score.Why Are payday loans a trap for consumers? ›
The interest rates are so high (over 300% on average) that people cannot pay off their loans while covering normal living expenses. The typical borrower is compelled to take out one loan after another, incurring new fees each time out. This is the debt trap.How can payday loans cause consumers to fall into a cycle of debt? ›
Avoiding the Payday Loan Cycle. Payday loans are short-term, high-interest loans that are very easy to get. The danger is that if you have to renew the loan, you fall into the payday loan cycle. This can cause debt to snowball, and costs a lot of money in the long run.Why are payday loans so popular? ›
Payday loans are often advertised to borrowers looking for quick and easy access to cash without barriers like a hard credit inquiry. But they also have a reputation for high interest rates and short repayment periods that can keep borrowers in a cycle of debt.
Payday lending further threatens the health of borrowers who experience financial strain, and worsens existing health inequities by trapping people and communities who are struggling to make ends meet in a cycle of debt and stress that extends beyond borrowers to their families and communities.How do payday loans prey on people? ›
Payday loans are a bad deal
High interest rates lead to borrowers being unable to pay off loans and cover their living expenses. Thus, borrowers fall into a debt trap—the payday lending business model that relies on targeting communities that are disproportionately minority or low income.
- Request a repayment plan from your lender.
- Use lower-interest debt to pay off a payday loan.
- Commit not to borrow any more.
- Pay extra on your payday loan.
- Consider debt settlement or bankruptcy.
Taking a Payday loan will not automatically affect the borrower's credit score as long as repayments are made on time. However loans are recorded on credit files and some lenders including a number of mortgage providers do not look on them favourably and may reject applications as a result.What is the most common reason that borrowing customers miss their loan payments? ›
Three of the most likely causes of a late or missed payment are: 34% have missed a repayment because of technology troubles. 31% of respondents didn't know what date their repayment was due. 21% of respondents did not know how much to pay.What is one thing that can cause a person to go into debt? ›
What are the main causes of debt? A variety of issues can cause debt. Some causes may be the result of expensive life events, such as having children or moving to a new house, while others may stem from poor money management or failure to meet payments on time.What is a fact about payday loans? ›
Payday loans are usually due in two weeks and are tied to the borrower's pay cycle. Payday lenders have direct access to a borrower's checking account on payday, electronically or with a postdated check. This ensures that the payday lender can collect from the borrower's income before other lenders or bills are paid.Is payday loan a good idea? ›
Payday loans are designed to trap you in a cycle of debt. When an emergency hits and you have poor credit and no savings, it may seem like you have no other choice. But choosing a payday loan negatively affects your credit, any savings you could have had, and may even cause you to land you in court.