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.
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.
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.
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|
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.
The most important thing for anyone is to feel financially secure. Only when financial stress is off the table, your employees can 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, 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.
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