LOUISE FAIRSAVE: Payday loans
Payday loans started off as small, short-term loans to meet unexpected needs for cash between paydays especially when you do not wish to involve relatives or friends.
Gradually, such loans have evolved to be more and more predatory: for larger and larger cash amounts, having longer and longer terms, with higher and higher rates of interest and having less and less to do with payday.
Some generous employers will allow a staff member to have either an advance of a month’s salary or an advance of an amount which is less than the month’s salary as a short-term loan. The period of deduction in repayment from future wages or salary will typically not exceed a month or two. Such a loan will normally be interest free. In special circumstances, some employers will consider extending loans for higher amounts for longer periods too. This type of loan is more in line with the original kind of payday loan.
However, being cash-strapped just before payday is quite common, so some businesses have developed over the years which provide cash advances and loans, typically at high interest rates and for longer periods. These types of loans are easier to negotiate; the loan process can take as little as an hour or two to get the needed cash in hand.
The more desperate you are for cash, the more likely you will ignore the danger signs and turn to a high-cost source of immediate funds. For example, when you need thousands of dollars in cash fast, you may find that an offer of a $12 000 loan for an 18-month period at 2.5 per cent interest per month just meets your needs. Even better may be a $15 000 loan for 12 months at 2.92 per cent interest.
A 2.5 per cent per month interest rate works out to 30 per cent per year and a 2.92 per cent interest rate works out to slightly over 35 per cent per year. Yes, the cash will meet your needs, yet does this loan service really deserve that much more of your earnings? If you are desperate enough to knowingly undertake such high-cost debt, you are likely already riding a perilous cycle of debt.
To undertake such a loan arrangement commits you to repay the sum borrowed plus exorbitant interest. Be warned that to make a late payment instalment or miss the payment completely, you are likely to be bombarded with calls, and text or email messages from the lender. This may include being bothered on the job about repayment.
A bad move to make in those circumstances is to roll over the loan so that it is repayable over a longer period in smaller instalments. That will likely escalate the interest charged and worsen debt problems.
Right from the beginning, it is best to consider other ways of borrowing – either an outright loan from your credit union, bank or other financial institution, or arranging a line of credit or overdraft facility. You should specifically seek debt handling advice when your debt situation seems to be getting out of control.
It is your responsibility to read each offer carefully, scrutinising the details in making a choice of the value to your situation. The advantage of dealing with your credit union is that you have access to a refund of some of the interest charged through the assessment of the patronage refund each year.
Payday loans are meant to be short term for small amounts of money relative to your earning capacity. Larger loan amounts which are needed for longer periods should be more carefully and thoroughly investigated before committing to a repayment agreement.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.