If you already know, you know. But if you don’t, we’re here to talk about why predatory payday loans, salary loans, and small-dollar loans are the absolute worst. Eric brings on finance expert Miranda Marquit to talk about what makes them so awful (3 letters, A-P-R), and alternative means to go to before taking one out.
Payactiv is here to help before the last resort.
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Hello, everyone. Welcome to the Good Cents by Payactiv Podcast. As always, I’m your host, Eric Rosenberg. Before we get started, it’s important to note that I’m not a legally registered financial advisor. And this show is just for entertainment and educational purposes. Thank you.
Hey, everyone. This is Eric. I’m so excited to have you back on the Payactiv Podcast. Today, we are going to talk about one of those topics that’s kind of near and dear to my heart. Why payday loans stink like a dumpster fire? Yes, that’s a real topic today. And payday loans really do stink. They’re a horrible financial decision if you’re at all able to avoid them. And that’s part of what Payactiv is all about helping you have an alternative to not use payday loans in similar products.
So to talk about why payday loans stink so much, we’re going to dive in just a moment with my very good friend and financial expert, Miranda Marquit, MBA. She has written for many financial publications across the web. She knows more about money than most people you will ever hear from and meet. So we’ll get started with her in just a moment. All right, here we are with Miranda. Hi, Miranda. How’s it going? Welcome to the Payactiv Podcast.
Hey, Eric. Thanks for having me on. I’m super excited to be here. I love talking about money. And it’s even more fun when you get to talk about stupid decisions you’ve made in your own life because, hopefully, somebody can benefit from it.
Yeah. So payday loans, I knew a lot about payday loans going into this experience a few years ago. I was at a conference. And we were sent on a list of activities. And one of them involved going to a payday lender. One thing that I learned, I knew payday loans were really expensive going in. But I didn’t realize how slow and efficient the payday lending process is and how much time people waste. It sounds like you’ve had that payday lending experience in the past on your own. What was it like for you? What was the time commitment like just before we get into the money part?
Yeah. So actually for me, it was fairly easy. This was very many years ago when I was in college. And it was between my freshman and sophomore year of college. And I was trying to find summer housing as one sometimes has to try to locate when you’re staying in your college town instead of going home.
And I had just got a new job. And so, I had this kind of lag between the end of the school year and when I was going to get my first paycheck and trying to move into a new place. And I turned to a payday loan. I didn’t want to turn to my parents and ask them for help because I’m strong, independent woman, and I don’t need any help from my parents.
And so I did. I went down to a payday loan place. And really, all they required of me was to show my bank account, show that I had an employment agreement since it was a new job. They did want to see that I had some sort of income coming in. And they were willing to float me some money. Like I said, this was a long time ago. They were willing to float me $250. And all I had to pay was a $25 fee, so about 10% of the whole total. So my payback was going to be $275.
And then, if I wanted to renew two weeks later, I had to pay another $10 for each renewal. I did not renew. After two weeks, my paycheck was securely into my bank account. And they had just set up an automatic withdrawal. And so, I didn’t even have to go back in and make a payment. Just two weeks later, they yoinked the money out of my account. And it was over and done. And it was easy. But it was also very costly, especially since I would’ve been better off, honestly, just ask my parents to front me some money and then moving on from there.
But the real problem is when you get trapped in these cycles, right? For $10 every two weeks, I could just keep renewing, renewing, renewing. And pretty soon, it does not take very long before your fees to renew exceed what you originally borrowed.
That’s such a common cycle we see out there, especially for people who are already in a financially vulnerable position where they decide payday loans make the most sense. So it’s really good insight. Thank you for sharing that story.
So, one thing I want to dig into a little deeper, you said the cost was $25 or about 10% of the cost of the loan. Now, for a lot of us, we’re thinking, “Oh, $25 to avoid getting evicted might be a reasonable expense.” But when we look at the numbers behind it, that 10% isn’t really 10%. So there’s a really important term to know that is APR or annual percentage rate. And that lets you compare one loan to another. So you could compare a credit card to a payday loan or a car loan to a personal loan. And it gives you kind of an apples to apples view of what the APR is.
So Miranda, I know you live in Idaho which has one of the highest average costs for payday loans when you look at it on an APR basis. Can you share a little bit about what someone might want to think about if they get one of these loans and they think, “Oh, it’s just 10%.” What is it really going to cost them if you compare to something like even a credit card?
So when you’re looking at an annual percentage rate and that’s the rate that you would pay to borrow the money on an annual basis. And so, if we’re talking about a payday loan, if we’re looking at a payday loan, then, things get a little bit trickier because you rarely think of it in terms of APR, even though they have to disclose that information to you, and it’s usually somewhere in the fine print.
But they do look at it and you can figure that out. And so, something for example is, let’s say, that you have a loan that you say, “Okay, let’s do a different calculation just using different numbers.” But let’s just say you do $375, and they do a 15% fee. So you’re looking at $56 and 25 cents. That’s kind of a lot. And so, yeah, you’re looking at this. And so by the time you get done and you go through all this stuff, you pay your 56-25 to borrow your $75. So that actually translates to an interest rate of 391% APR.
So that means for, for listeners who don’t do a lot of math in their head, if you borrowed that amount over an entire calendar year, it would be like paying the loan back four times over an interest.
Yeah. Pretty close to that. Yeah.
Just short of four times over. Every 100% is paying the loan back another time. And if you look at some states like Idaho, do you happen to know off the top of your head what the highest rates are around your region?
There is no limit. So we are one of those states that do not impose a limit on APR. And so, it’s actually possible to get APRs as high as five or even 600% here in Idaho, which is just grotesque. I mean, for instance, if you were to borrow 100 bucks and you paid $20 in fees-
In total cost.
Yeah. In total cost. I mean, if you’re paying $20 per $100 borrowed, you’re paying 521%. So if kind of this kind of arrangement keeps going, then, yeah, you’re looking at a huge APR.
So when you think about those APRs, like I mentioned, you can compare to other types of loans and get a kind of apples to apples comparison. So we mentioned these payday loans can often charge hundreds of percents. The highest I’ve seen when doing research is around 700 or 800% in the US which is just astronomical. It really is a predatory amount of money to ask people to pay back for borrowing.
But when you look at it compared to other costs, everyone doesn’t have great credit. Sometimes, that’s why they end up at a payday lender. They might not qualify for a credit card or other lower interest debt options. But just for comparison sake, Miranda, what does a credit card typically charge an interest so we have that comparison?
Yeah. So it really kind of depends on where you’re at. What you’re looking at here for average credit card rates, right now, it’s about 19.13%. So it’s fairly common to pay anywhere between if you have really excellent credit, maybe 13%. And if you have bad credit, closer to like 25% or 26.99% or something like that. But, yeah. So if you’ve got a credit card depending on what you are, and it depends too. I have a Union credit card where the APR on that is 9%. And so, it sort of depends on what kind of card you’re getting and everything else.
But in general, your rates are going to be much, much lower. And it’s fairly common to pay somewhere between 13.99% and 26.99%, depending on various factors. So way, way. If you have an emergency and you have a credit card, you’re better off putting that on the credit card than getting a payday loan.
Also just another numbers example here. So the example you gave earlier, if you get a payday loan for $100, and it costs $20 to pay it back, that’s 20% per borrowing period. So that’s how the APR gets much higher. So you’re paying 20% to borrow the money, let’s say, two weeks. With a credit card at 20% APR, you would be paying $20 if you borrowed $100 for a year.
So that time period difference when you’re borrowing, that’s what APR tells you, right? It’s what you would pay over the year. So thinking back to how that affects you, if you can skip that $20 per month cost and use the credit card instead and pay much, much lower rate. If you pay the loan back in the same amount of time in the two-week period with the payday loan, you’re going to be paying, like we said, $20 with a credit card, you might pay zero because you don’t ever pay interest if you pay off your balance in full by the statement due date.
But even if you do have to pay interest, it’s going to be much, much less than $20. For $100 over a month, it should be a very small payment. We could do the math. But we’re not going to because it’s boring. It’s just good to know.
Right. But, yeah. But the bottom line here is there are other ways. If you have access to different types of money, then, you’re going to save money. I mean, you’re just going to pay less.
Yeah. That is so helpful. So, I mean, now, we know how bad payday loans are, how expensive they are, how much it costs. And if you roll it over and over and over and over, how you can end up paying easily more than you borrowed to begin with. Let’s think about some strategies to avoid having that happen to begin with which depending on your income isn’t always that easy. But we can take some steps to plan ahead for those unplanned events. So could you share a couple tips and ideas for how someone might be able to save and plan ahead to avoid needing a payday loan?
Yeah. So I think first of all, you want to take a step back and take a look at kind of your spending habits and figure out where is your money going? What are you spending your money on? Are there places you can cut back? Are there things that you don’t need that maybe you’re spending money on? Are there things that you don’t really want that you’re still spending money on? What kind of subscriptions do you have? Are there places where you can cut back?
So kind of start with that. And put that money that you’re saving. There are some experts that say that the average American household wastes between 5% and 10% of their income. If you are making $3,000 a month, then you’re looking at… Usually, that’s estimate about 150 to $300 a month that you can per perhaps say, like, okay, this is something that I can maybe do if I can just cut five to 10% from my budget.
So start by doing that and looking at that. And then, put that money into a savings account. Put that money into a high yield savings account so that you can start saving up for emergencies. There are some people that suggest that you start an emergency fund and try and just get that base fund to somewhere between 500 and $1000, and just save that first 500 to $1000. And that can go a long way. Your average emergency is about 400 bucks.
So being able to save 500 to $1000 is a really good first step. If you can’t cut anymore, look for ways to make a little extra money. We talk about side hustles all the time. There are small things that you can do to make a little extra money, even if it’s a couple hundred bucks a month. That extra money can once again, go into a high-yield savings account that can sort of pad you out in the event of emergency.
So really just developing that habit is a really good way to start, is really taking a look at your budget, really taking a look at where your money’s going and saying, “Okay, where can I divert a little bit more towards savings?” And even if it’s a small amount, even if it feels small to you, even if it’s like 10 bucks a week, having that habit and saying, “Okay, I’m going to find 10 bucks a week to put into my savings account,” and saying, “Okay.” And now after I’m used to that saying, “Okay, now I’m going to put 15 bucks a week into my savings account,” because once you start getting used to that and building that habit, you start looking for other ways to make it happen. And so, I think starting small and just working toward that goal and not feeling like you have to have it all at once is a really good place to start.
Yeah. That’s great advice. And I love automatically saving and setting a goal like you were saying. If you could do, let’s say even $5 a week. Let’s say you work five days a week. I bet you could come up with $1 per workday to save in your account. And if you use the Payactiv account and the Payactiv card with direct deposit, that can all be automated. You click a couple buttons. And when your paycheck comes into your account, the amount you want to save goes right to your savings goal. And many banks offer similar features.
So it’s important to know that you can automate that savings so you don’t have to remember to walk down to the bank or to open up the app on your phone or to log onto the computer. You just have to set it up once. And it’ll just keep working. As long as you keep having a paycheck come in, you will automatically keep saving. And that’s a pretty cool way to save. And it means you’re not going to be tempted to accidentally spend that money on something like, I don’t know, new shoes or an Xbox, or I don’t know, whatever fancy thing we can pick on, too much coffee.
There’s a lot of things that people waste their money on. And if you are budgeting for savings, you know your money is available for that savings first. And then, if you want to spend on those fun things, you don’t have to worry because your savings are covered.
That’s a strategy I like.
Yeah. And I automate all of my stuff too. All of my accounts are automated in that same way. And it’s really good because, like you said, you don’t have to worry about remembering to transfer the money, remembering to go down someplace. You don’t have to remember any of that. It just happens automatically. And for me, it’s actually kind of fun about once a month, I have a little money date with myself. And I just double check all my accounts and reconcile and do those things. And it’s kind of fun to see how my automatic savings. And I also use tools like round-ups. So there are different accounts and different apps that will round up your purchases and drop the money in there.
So I use those too. And so for me, it’s really fun to see, okay, how have the roundups been doing for me today and will this month? And it is kind of fun just to look at that and see what you’ve got coming down the pike and see how your balance grows. You might be surprised.
Yeah. It’s fun. When you can make it feel like a game to put money away, you’re competing against yourself. And no matter what happens, you’re going to win as long as you keep putting money away. But you are the long-term winner because, ultimately, at the end of the day, the more you save, the more you have for whatever that future goal is, whether it’s avoiding an emergency, making sure you have cash for rent on the due date or groceries, or to pay your car payment, whatever that stressful bill is, you have a little bit of a pad and a buffer.
And once you get that emergency fund in place, you can start thinking about even more fund savings goals like saving for maybe taking a trip or getting an upgraded car, or maybe getting that fancy electronic or fashion accessory. Once you start saving automatically for emergencies, you can start saving for those fun things. Can you share a Miranda? I mean, you had that payday loan story. You said you paid it off in one payment cycle. Now, looking back, you said you’d tell old Miranda or not old Miranda, young Miranda-
Not that you’re old Miranda now. You would tell younger Miranda to avoid that loan. Go ask your parents for money. If someone’s in a pinch, is there anything else you can think of someone might do to help avoid a payday loan?
Take stock of your resources. For me, I didn’t have a good emergency fund built up, obviously, which is why I had to go to payday loan. I had already maxed out my credit cards… Well, credit card. I only had one. I was a student. And so I had maxed out my $500 limit on my credit card.
And so, I think some of the things you can do are well, first of all, see what kind of resources you have in terms of your network, your family, your friends. Are there people that you can go to, to borrow some money for a short period of time? Do you have people who might be willing to pay a bill for you rather than give you money directly? And then also in your community? Are there resources? Know resources ahead of time.
Maybe, if you’re having a rough week and instead of going to the grocery store, you go to the food bank or the food basket and get some food there. And then, you can use the money you would’ve spent on groceries to cover a bill. And so things like that, understanding what resources are available in your community, very important. Many communities and states also have rental assistance. And so, if you’re struggling to pay rent, if you know that you’re going to have a hard time making rent next month, now is the time to start addressing that issue.
And that really applies to most things with money. It’s really common for us to put our head in the sand when we’re faced with money issues, when we know we’re going to struggle or know we’re going to have a problem. It’s very common for us to try and avoid it. But really what you need to do is be active about it and say, “Okay.” If I know I’m not going to be able to make this loan payment, contact your lender and find out, well, can you skip a payment this month?
I mean, they’re still going to add that amount that you skip to the end of your loan and you’re still going to have to pay it. And you’ll probably have to pay a penalty. But it’s probably going to be less than if you get stuck in a payday loan cycle. Find out how you can work on those efforts as well. Keep clear on your credit cards. I mean, part of the reason why my credit card was maxed out is because I had been on a shopping spree the month before. And I had a beautiful new wardrobe, but a maxed out credit card.
And so if you want to be able to have a credit card available for these kinds of emergencies, make sure you’re not maxing it out. Make sure you’re paying it down. Those good credit habits will also help you when it comes time if you need a personal loan, right? If you need a personal loan, can get a better rate a lot of the time. When I had to make one of my cross country moves, I ended up getting a personal loan to help cover that cost. And I was able to get it quickly and have the money in my account the next day and do it for a 7% interest rate.
Now, that’s probably not going to happen in today’s interest rate environment. But at the time, it was a very low personal loan rate for me. And it was just very nice to have the money immediately. And so setting yourself up with those good habits can help you in the future avoid these problems. And of course, an app like Payactiv can provide you with a little bit of cushioning and a little bit of extra room and do so without the really high APR.
So you just took the words right out of my mouth. I was about to mention Payactiv has a great payday loan alternative feature called earned wage access or EWA. It is not a loan of any kind. It’s not a payday loan. It’s nothing you have to pay back. It’s early access to the money you’ve already earned and just haven’t been paid. So let’s say you work at a big retail store. You go in. It’s Wednesday. Your rent is due on Thursday, and you don’t get paid until Friday. You might be able to get up to half of your paycheck early the same day you tap a button, so you can make that rent payment. And you’ll just have a slightly lower paycheck or half lower, however much you take out ahead.
But again, it’s not a loan. Nothing you have to pay back. And it costs much less than a payday loan. The max you’ll ever pay is $5 per pay period. So that’s another option. It’s good to have in mind. And hopefully, you have that savings and an emergency fund so you wouldn’t need that feature either. But if you do need it, it’s good to know it’s there. And Payactiv offers a whole platform with free services in addition to that.
So if you are a member of Payactiv, you can get free financial counseling, free budgeting tools and a heck of a lot more. So we hope to see you on the Payactiv app*. So thank you so much, Miranda. We appreciate your time. We appreciate your expertise and being here with us. If somebody wants to learn more and connect with you and find the great Miranda Marquit somewhere out on the web, where should they point their browser?
Yeah. So if you go to mirandamarquit.com, that’s my name, .com, mirandamarquit.com. You can find me there. That’s kind of my home on the web. But you can also find me on Twitter and Instagram at MMarquit, so not my full name, just @MMarquit. And you can find me on those places. And then, you could also find me with next advisor by Time, Forbes. I’ve written for a number of publications. So you can usually find me in those places as well.
Wonderful. Thank you so much. Be sure to check the show notes for links to Miranda and to download the Payactiv app* if you have not already. Thank you so much again, Miranda. Thank you, listeners, for sticking with us till the end. And we’ll talk to you next time. Have a great rest of your week. Bye-bye.
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