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The Truth About Your Staff and Payday Loans
Technically, there is no set definition for a payday loan because this type of loan can differ for every borrower. However, such a loan is typically for an amount less than $500, has a high interest rate and is due on the borrowers next payday. Depending on your state law, payday loans may be available to your employees online or through storefront payday lenders.
Common Features of a Payday Loan
Payday loans usually have the following features:
- The loans are for small amounts, many states have set a limit on the amount that can be borrowed. A $500 amount is common for a payday loan, though people can borrow slightly less or slightly more.
- This type of loan is usually repaid in a single payment on the borrower’s next payday, or when money is received from another source of income, such as a social security or pension check.
- To repay the loan, the borrower must write a post-dated check for the full amount borrowed, plus interest and any fees and give the lender authorization to debit the amount. If the borrower doesn’t repay the loan on time, the lender will cash the check.
- Many payday lenders charge high interest rates and exorbitant fees and do not consider the borrower’s ability to repay the loan.
Who Borrows Payday Loans?
Each year, 12 million Americans take out payday loans. On average, a borrower has eight loans of $375 and spends $520 on interest annually. The majority of payday loan borrowers are white women between the ages of 25 and 44 years. However, there are certain groups of people who have higher odds of taking out a payday loan. These include:
- Home renters
- People whose income is below $40,000
- People who are divorced or separated
Many payday lenders are preying on people who are already struggling to stay afloat financially. Such predatory lenders are willing to make loans to people whom they hope will have to take out more loans and end up becoming trapped in a vicious debt cycle with massive fees.
Why do Your Employees Take Out Payday Loans
Studies show that the majority of people who take out payday loans do so to pay for day-to-day living expenses such as paying their rent or mortgage, paying household bills and buying food. Some of the other main reasons for a payday loan is to pay for emergency expenses such as medical bills and car repair, to make seasonal purchases, or because they are out of work.
Payday loans are also attractive to people who have bad credit and are unable to borrow money from a bank or other more traditional money lender. No credit check is required for a payday loan, one of the characteristics that makes them so appealing to borrowers.
A number of states throughout the U.S. have set laws in place to regulate money lending. These regulations are known as usury laws and define which terms and rates of lending are permissible. Some states have also set laws which limit the amount a payday lender can lend and the fees they can charge the borrower. Other states, such as New York, have prohibited payday loans completely. Many payday lenders get around these laws by teaming up with banks located in other states.
Why Payday Loans Are a Problem
Payday loans can become a problem for your staff, and this can ultimately become a problem for you as an employer. Many borrowers have difficulty paying back the loans because of the high interest rates and fees; despite this, payday loans are very popular because the idea of obtaining fast cash is so appealing. It gives employees a way to provide an immediate solution to their financial crisis, even if it means they will lose money in the long term. In many cases, employees take out these loans because they have to make a quick decision to solve their cash flow problem and they feel that a payday loan is the only option they have left.
Payday loan deals may look good on the outside, but most are too good to be true. Many people who take out this type of short-term loan get trapped in a debt cycle, and it’s not even large purchases that are putting them and keeping them there. Research shows that 7 out of 10 borrowers use payday loans for every day, recurring expenses such as utilities and rent.
Although there are many reasons why people choose to take out payday loans, there are equally as many to stay clear of them. These include:
- Their expense: Because of the high interest, sometimes as high as 500 percent, lender fees, and late fees, payday loans are very expensive.
- The debt trap: Because payday loans are so expensive, people often get stuck in an endless cycle of debt because when they can’t pay off their current loan, they have to take out another loan for repayment.
- Increasing debt: Because of the high cost of payday loans, debt grows rapidly.
- Easy to borrow: Because payday loans are so easy to borrow, people often choose this method to help them get out of a cash flow crisis when all it does is worsen their predicament in the long term.
- Bad conditions: Most payday lenders require access to the borrower’s bank account. This can lead to high overdraft fees when it’s time for repayment.
- Unpleasant consequences: When employees owe more money than they are able to pay back, the consequences can be harsh.
What Are Better Alternatives to Payday Loans?
Although employees who are suffering a financial crisis may think that a payday loan is the right option to help their situation, there are better alternatives. As an employer, you could recommend the following:
- Negotiation: If an employee is in debt and behind with payments, he or she could negotiate a payment plan with the creditor.
- Credit cards: If possible, charge unexpected expenses to a credit card. The interest rate is lower than that of a payday loan.
- Alternative loans: If a loans benefits program is offered by the employer, the employee can request a loan through this service.
- Overdraft: Some banks allow members to take advantage of their overdraft protections if they are available.
- Credit line: If the employee has a good credit record, he or she may be able to get a line of credit or a small loan from an FDIC-approved lender.
- Savings: If the employee has a savings account, he or she could borrow money from that.
- Ask for help: Some employees may be able to ask a friend or relative for help.
Short-term predatory loans can be very harmful to your employees. Not only can they result in an endless cycle of debt, but they can also lead to high levels of stress and poor health, which will eventually affect their work. Encourage your employees to talk to you if they are having financial difficulties and help them find a way to get out of their situation without having to rely on a payday loan.