Personal Expense Tracking: Payday Loan to Keep the Lights On

Today’s train wreck is about payday loans. One great way to avoid payday loans is through personal expense tracking and solid budgeting.

I think the worst thing I ever did was purchase a car from “Ugly Duckling”, also known now as “Drive Time.” Basically, your down payment is the value of the vehicle, and then you’re hit with huge interest rates. The vehicle I got didn’t last a year before the engine blew, but I still owed 2 more years on it. Definitely teach your little ones to stay away from “buy here, pay here.”

The second worst mistake I’ve made involved “payday advance” places, which hold your check until the next payday, but charge huge rates. I’ve written a $350 check to get only $275 in cash; the rest was their profit. Then the next payday rolls around, and you have to do it all over again.

If you must use one, do it for my first reason, not my last. Initially I simply needed money to cover an electric bill, or my lights would be cut off. I had two choices: let the check bounce (and pay $35 for a bounced check fee while risking some nights by flashlight), or pay $25 for the fee on a check that was enough to cover the electric bill and make a cash deposit in my bank account.

The advance was $10 cheaper, didn’t hurt my credit or risk legal issues with bouncing a check, and kept my lights on.

If I had stuck to just this, everything would have been fine. But the bottom line is, it’s too easy to get caught up in this high interest “loan shark” deal, and soon end up paying a large part of your income in advance loan interest.

By the way, I still don’t blame these places for their high rates: a $35 or even higher fee on a bounced check for $5 is a much higher fee than $25 on $100 loan. What your bank does is a thousand times worse than any pay advance place.

Mint’s Take Away:

While it’s true that a bounced check fee from banks can be quite high, they’re usually an exceptional fee — unlike the fees from a payday loan, which are always imposed upon you for the service. We definitely agree with the poster, though, that it can be very easy to get caught up in the (extremely) high interest “loan shark” deal.

Payday loans often compare their annual percentage rate to that of rates imposed by banks and credit card companies on late fees. In reality, though, payday loans are incredibly costly compared to alternatives available.

Let’s compare the original poster’s cash advance from the payday loan to a cash advance from an average credit card.

Payday loan cash advance: $275 loaned, $75 in fee = 327% APR

Average credit card cash advance cost: 3% fee for amount advanced and 25% APR

Credit card cash advance: $275 loaned, $8.25 in fee and $5.75 in interest if paid off within a month. Total cost? $14.

$14 fee vs. $75 fee for the same $275 loan.

Quite a difference!

Although we will never suggest resorting to cash advance from a credit card, they are by far less costly in interest & fees when compared to a cash advance from a payday loan. In fact, if the credit card cash advance is paid off in two weeks (which is the normal duration of a payday loan), the fees you incur will be even less.

In situations like those described by original poster, an emergency fund will come in quite handy! Read more about the importance of an emergency fund and find out how to get one.

Remember, personal expense tracking is important. Without it, you might need to make some very difficult financial decisions.

Train Wreck Tuesdays are a weekly post of horrible financial mistakes. They are posted anonymously. Submit your story; if you’re selected, you get a free personal finance book. The best comment gets the same prize! Check out past Train Wreck stories here.