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Say pass to payday loans.

By June 10, 2016No Comments

Beat debt by knowing the risks of short-term, high-interest loans.

Beat debt by knowing the risks of short-term, high-interest loans.

Payday loans have been in the news quite a bit lately: Google just announced that it would ban all payday loan ads on its website, and the Consumer Financial Protection Bureau (CFPB) is planning to release new laws for payday loans in the coming weeks. The anticipation has some lenders on the edge of their seats.

So, what’s the big deal? As it turns out, recent reports from the CFPB and the Pew Charitable Trusts show that short-term, high-interest loans can trap borrowers in a cycle of debt. Whether members have just heard about them or actually made use of them, it pays to know the dangers of payday loans before taking one out, as well as alternatives to this risky type of loan.

What are payday loans and why are they risky?

The CFPB describes a payday loan as “a short-term loan, generally for $500 or less, that is typically due on [the borrower’s] next payday.” Borrowers must usually give payday lenders access to their checking account or write them a check for the total amount of the loan. This guarantees that lenders have a way of attaining the payment when it comes due—usually a lump sum.

According to the CFPB, “the cost of payday loans (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on credit cards can range from about 12 percent to 30 percent.”

This extremely high interest rate is only part of what makes payday loans so risky—their short terms are the biggest culprit. People take out payday loans because they run short of cash between paychecks, and payday lenders make getting a loan all too easy. More than 80 percent of borrowers, however, find they still don’t have enough to pay off their loan by the time it’s due just two weeks later, according to the CFPB report. So, they borrow again, entering into a cycle of debt where loan fees and penalties quickly start to add up on top of what’s already owed.

Putting members’ financial wellbeing first.

As a credit union of people helping people, Verve strives to offer members financial products that not only provide them with the money they need when they need it but that also help them avoid debt. Sometimes cash runs low. We get that. But rather than go for a risky, payday loan, we recommend one of these financially healthier options—all just as easy to get started with as taking out a payday loan:

  1. Tap into savings.

The importance of having money set aside for times of need can’t be emphasized enough, and it’s also important to know when to use it. Because it can be so hard to get out of the payday loan cycle, drawing from savings is almost always going to be the better option.

  1. Don’t pass up plastic.

Even a high-rate credit card is a far less costly way to borrow than a payday loan. Verve offers members some of the lowest credit card rates in town with the RateFirst MasterCard®. Read more here.

  1. Try a personal loan.

Verve offers a range of personal loans designed to help members out when they need extra cash with a far lower interest rate than what they would get with a payday loan. Members can beef up their credit by using the money they have in their savings as collateral in a secured loan or keep it open-ended with a signature/unsecured loan. Click here to learn more.

Helping members succeed through healthy financial products like these is what being a credit union is all about. At the heart of all financial cooperatives is the idea that working together makes life better for everyone involved, and we can make a big difference by growing financially stronger together. For more information about Verve’s guiding, cooperative principles, click here.

To learn more about the financial products described above, call Verve at 800.448.9228 or stop by any branch to speak with a team member.