High Price of living on the egde…payday loans

No, I did not take out a payday loan recently, though I did  over a decade ago  and it wasn’t the end of the world. The reason I am writing this is because someone recently posed the question to me about how bad is it to take out a payday loan? For those not in the know, payday loans are short term loans you get meant to help you out until payday….say you are a working stiff and suddenly your car dies and needs $500 worth of repairs. In the ideal world you would have some type of emergency fund that could easily cover the cost of such an unexpected expense or at the very least you would have a credit card for this type of thing.

Problem though is for millions of Americans that live on the financial edge either by choice or circumstance, what they earn is what they have….meaning there is no emergency fund or credit card to handle such an unexpected expense. It seems that many times folks who live on the edge often don’t have friends and relatives who can float them a loan since they too are living on the edge. Once upon a time, it was considered okay to ask your employer to float you a loan and take it out of your paycheck but that sort of thing rarely happens anymore and is considered in poor taste.

So you need that car fixed otherwise you aren’t going to work, or maybe you are a single Mama and your kid’s father decided to not pay child support and you don’t have enough to pay the kid’s daycare, buy food and make the light bill. What do you do? Enter the payday loan joint, a place where you can borrow say $500 with no credit check either by giving them the title to your car or writing a postdated check where you write the check for say $575.

Now payday loan places have lots of critics, for starters they charge insane interest rates, and for many users have created a trap where the user is only paying interest and taking months if not years to pay off a seemingly small sum of money. Of course in recent years as the horror stories have gotten out, states have started to clamp down on these outfits though a cursory search on Google shows they do still exist. I suspect with the economic downturn they have found new customers with the formerly middle class. After all just because one’s income drops doesn’t mean one’s bills have dropped and sometimes you need cash. Dental work, car repairs, etc…all things that come up and when they do you need cash.

So my thoughts? I think because most of us would never ever want to ask a friend to float us a few hundred bucks (which I did recently, in fact it was a joke, I had a plumbing situation that came up and a buddy floated me the cash for a few days to cover the bill and I later loaned her some cash while she was dealing with a situation) places like payday loans will always have a place. I think they also exist because mainstream financial institutes tend not to make products that work for those on the financial fringes, its well known that in larger cities especially in minority areas there are a shortage of banks and credit unions. Instead leaving the inhabitants in such areas to utilize check cashing joints (in Chicago, we call these places currency exchanges) and payday loan places to meet the financial needs of the people. Until banks and credit unions stop using the much revered FICO score (check out Edmund Andrews book Busted, a 6 figure earning NY Times reporter who got a half million dollars in mortgages that he could not afford and is now in foreclosure but because he started off with a stellar FICO score he was able to get this cash) to determine things such as whether or not someone is credit worthy since there are a number of reasons why someone might have a less than perfect FICO score but still be  able to pay back a loan or be responsible with a credit card.

In fact as I have learned once you have a lousy credit score it can take years to get it back in the right direction…having married really young and made a few bone headed moves in my early 20’s, I have struggled most of my adult life to have a good credit score. It probably doesn’t help that professionally I do work that pays little so never is there an infusion of cash to make good decisions when it comes to finance. Though I will say with age comes a different perspective and hopefully when I check out I will leave this world with good credit.

So to the person who asked me about payday loans, in the ideal world you would avoid them because yes they are predatory. On the other hand if lack of transportation or daycare will make you lose your job thus creating a downward spiral of economic woes, take that loan out if you have no other choices but do everything you can to pay it off in a timely manner. Ideally you would work towards creating an emergency fund even  if its only $5 or $10 every few weeks so that in the future you won’t be in such a place.

If anyone else has any thoughts on payday loans, feel free to share.