Imagine living paycheck to paycheck. One day you have a medical emergency and are left with a bill that seems astronomical to you. Your paycheck isn’t due for a few weeks, and you have very little savings to cover this bill. Now you have to decide between food, rent, and this bill. What do you do? Many end up at the doors of predatory financial services to help make ends meet. However, they get caught in a crippling debt trap that becomes harder to get out of the longer one stays in. Your employees may be at this point and could be the next victim of a predatory financial scheme that is entirely legal with no easy recourse to get out.

What is a Payday Loan?

A payday loan (aka payday advance or cash advance loan) is a short-term loan that only employed persons are able to take out. It’s necessary for the consumer having employment records. Usually, this loan is unsecured, with the understanding that the consumer will pay back the loan once they get their next paycheck. Normally, one has to go in person and provide their information and to make payments on their loan. However, there has been a recent rise in online payday loans. Essentially, a consumer is able to complete the loan application online. If they are approved, they connect their bank details and the money is deposited directly into the bank account. When it comes time to pay, the loan repayment and any associated charges are taken electronically on payday.

What it boils down to is a short-term, unsecured loan that doesn’t necessarily rely on a person’s credit score or financial status. The median size of a payday loan is $350 with a fee of $55 for 2 weeks.

Often, what will end up happening is the borrower is unable to cover the repayment and rolls their debt over to the next pay period. What this entails, is another $55 fees for 2 weeks plus interest. The average number of times a payday loan is rolled over is 8.

What are Payday Loans Used For

The FDIC found that “18.7% of U.S. households…were ‘underbanked’ in 2017, meaning that the household had a checking or savings account and used… products or services from alternative financial services (AFS) provider…” (https://www.fdic.gov/householdsurvey/2017/2017report.pdf) <. 18.7% of U.S. households is about 24.2 million households in America. Of course this doesn’t mean that everyone is using payday loans all the time, however, it is a much more prevalent practice among lower income demographics.

Many of these loans are being used to help consumers on a day to day basis. Some of it stems from poor financial literacy and some stems from a lack of financial wellness program. Your employees may not have the necessary tools to help them stay financially stable, especially as hourly workers.

How to Obtain a Payday Loan

According to the Consumer Financial Protection Bureau (CFPB), to qualify for a loan, most payday lenders will require that borrowers:

• Be at least 18 years old
• Have an active checking account
• Provide some proof of income as well as valid identification

In most circumstances, the borrower writes a check for the loan amount plus a lending fee, and the payday lender retains the check until an agreed-upon due date.

What Payday Loans Can Cost You

Payday loans are a vicious cycle and financial pitfall. For example, one might borrow $1,00 to cover their bills and rent with the intent to repay in a month. However, there is an added expense when the high-interest rate is taken into account. Let’s say roughly $3130.85 per year. This would put a person eventually repaying at a 400% interest rate!

Type of Loan	Monthly Payment	Interest Rate	Annual Interest
Personal Line of Credit	$87.92	10%	$54.99
Credit Cards	$92.63-$97.49	20%-30%	$111.69-$169.85
Title Loans	$268.45	300%	$2221.37
Payday Loans	$344.24	400%	$3130.85

Eventually, when payday comes, people are unable to fully pay it off due to other bills that need to be paid. This is when they end up rolling over their debt. The loan has a new repayment day, but the interest and fees stack up from the previous month, increasing the debt month to month. These debt traps are long term problems that your employee is on the hook for.

What Are Payday Loan Interest Rates?

Payday lenders are renowned for charging extremely high interest rates, sometimes as much as 780% in annual percentage rate (APR). The average loan runs around 400%.While many states have laws in place that put limitations on interest charges, many payday lenders take advantage of exemptions that allow for their high interest charges.

What Steps Have Been Taken to Regulate Payday Loans?

In recent years, numerous efforts have been put in place to better regulate the payday lending system. For example, in 2017, the Consumer Financial Protection Bureau (CFPB) passed rules to protect consumers from what was referred to as “debt traps.”The rules included a compulsory underwriting provision that states that a payday lender must assess a borrowers’ ability to repay their loans and still be able to meet their basic living expenses before the loan is made. In addition, lenders must provide written notice before attempting to collect from a borrower’s bank account.Furthermore, after two unsuccessful attempts to debit a borrower’s account, the payday lender cannot try again without the borrower’s permission.These rules will become mandatory on June 13, 2022.

Is It True that Paying Back Payday Loans Raises your Credit Score?

Unfortunately, not. That’s because payday loans (and any payments you make) aren’t reported to any of the major national credit bureaus — Equifax, Experian, and TransUnion — so there’s no way that your on-time repayment of payday loans will improve your credit union score.

What If I Am Unable to Repay a Payday Loan?

If you fail to repay a payday loan on time, you’ll likely face one or more of the following circumstances:

Debits from Your Bank Account

Most lenders will try to withdraw the funds you owe them from your bank account. Should these transactions be declined by your bank because of you having insufficient funds, the lender might start initiating withdrawals of smaller amounts. With this, your bank fees could well start piling up quickly.

Collection Agencies Get Involved

Should the above course of action fail to result in the lender recouping their loan, they might initiate collection efforts. This will typically involve you receiving repeated calls and letters demanding payment.

Your Credit Score is Negatively Affected

Once the unpaid debt has been handed over to a collection agency, lenders seeking payment on the amounts you owe them might also decide to report you to the major credit bureaus. Your credit union score will likely take a knock – something that you might have to live with for up to seven years. As a result, you’ll likely find it difficult to secure reasonable financing arrangements in the future.

A Lawsuit from the Lender

If the lender decides to take you to court and can prove you owe them the stipulated amount, the judge will order you to pay the amount owing or risk having your wages garnished.

Negotiations Are Entered Into

A far less stressful, less costly option is to work with the lender to settle the loan debt for a mutually agreed-upon sum.

What Is the Distinction Between a Secured Loan and an Unsecured Payday Loan?

Secured loans are loans for which the lender requires collateral. Collateral is typically required for large loan amounts or if your credit score isn’t good enough to qualify for an unsecured loan.Secured loans are less risky for the lender, while the borrower often benefits from lower interest rates. However, some secured loans come with high interest rates attached, particularly if the borrower has a bad credit union record or the loan is a short-term one.Examples of secured loans include:

• Vehicle and car title loans
• Mortgage loans
• Secured credit cards
• Loans from pawn shops

Unsecured loans are granted without the need for collateral from the borrower. The process for granting these types of loans is far less rigorous than for secured loans.

Examples of the unsecured loans include:

• Credit cards
• Debt consolidation services
• Student loans· Payday loans

Alternatives to Payday Loans

The most important thing for anyone is to feel financially secure. Only when financial stress is off the table can your employees be truly engaged at work. That’s why we recommend a holistic financial wellness approach that helps your employees succeed.Payactiv is a public benefit corporation, and we promote only responsible financial practices. You can be assured that your employees will never pay predatory fees to access the money they have already earned, even when it’s before payday.