I have a good friend who I may have to un-friend because he is going in to the Pay Day Loan business. He tries to tell me this is an important business that fills the need for low income people with bad credit. In my eyes that is why it is such an evil business. Preying on those who have the least, pay day loans make most of their profit off of the fees, not the interest. A typical pay day loan charges $30 in fees per $100 lent. Then they charge an interest rate on top of that. On the 2 weeks that a typical loan is termed the interest could be 50% annual interest and in 2 weeks would only add up to $2 on a $100 loan, so I don’t know why they set them at 20%, the interest is “free” compared to the fee.
There are laws limiting the amount of fees a loan can have but a pay day loan isn’t one loan, it is several micro loans, designed to maximize those fees. Then because most people at the income levels that need this kind of loan are living pay check to pay check if they don’t have the $100 this week, there is no reason they are likely to have this money next week either, so they have to get a new short term loan, with the new fees. For this reason the average $100 loan has a $500 return, and that is over 90 days.
There are those who think pawn shops are the scum of the earth, but at least with a pawn shop when you sell them your item, you can come back buy it for more than you sold it, re-sell it, and usually only take a 15-20% per 30 days. That’s between a third and a half the fee rate of a pay day loan. Granted it requires you have something worth pawning. With the fast depreciation of electronics, such as Xbox, Wii, and PlayStation 3, your TV isn’t likely worth anywhere near the $1,000 you paid for it even 6 months later. Your iPod is likely only worth a fourth what you paid for it, and so you may be looking at items a bit more personal, like wedding rings, jewelry, or other family heirlooms.
If your car is paid off vehicle title loans can be one of the least expensive, and least impactful ways to get a few hundred dollars on the quick. A vehicle title loan, is typically at credit card type interest rates, and uses your car title as collateral. Basically this is like a reverse mortgage for your car. You keep your car, but buy it back from the creditor as though you had just purchased it used.
What ever method of short term finance you are looking to use, check around, and play the competition against one another. Likely you can save quite a bit of money by comparing two offers, and being willing to walk away from the people making the loan. These are people used to working with desperate people, telling them your sad story, won’t help, but walking away, or telling them what their competitor down the block offered can help.
Just like going to a job interview, dress for the pawn broker or title loan company. While payday loans are pretty standardized, a pawn broker and vehicle title loan broker is likely to give you a better valuation if you look like you are going to pay the loan back, than they would if you look like you are about to go back to prison before the first payment is due.