“It’s important for consumers to understand that this is really a policy problem,” Farahi says. Though consumer finance education can help, they say greater regulatory efforts are needed to address the issue truly. They’re paying some amount, but it’s not enough to get them out from under this.”Ĭlark and Farahi emphasize that borrowers shouldn’t feel ashamed for being stuck in a payday loan debt cycle. “Even when people feel like they’re making progress, they’re not actually paying down their loans,” says Yasmin Farahi, deputy director of state policy and senior policy counsel at the Center for Responsible Lending in Durham, North Carolina. However, renewals require an additional fee, making it that much harder to catch up when the loan comes due again. If borrowers can’t repay, they may be able to renew the loan depending on their state. “It causes more stress, and people fall into a cycle where they aren’t able to catch up.” “Payday loans may provide immediate relief in a financial crisis or a financial trauma, but then it almost retraumatizes you,” Clark says. But when people can’t repay, their financial situation becomes more precarious. Paul, Minnesota, that helps families break out of predatory loan debt. For context, financial experts consider 36% the maximum APR a loan can have to be affordable.īecause payday loans are relatively easy to get, they can also feel like a surefire solution to an urgent financial problem, says Anne Leland Clark, executive director of Exodus Lending, a nonprofit based in St. They’re considered high-interest because of their fee structure.Ī typical two-week $100 payday loan comes with $15 in fees - which equates to an annual percentage rate of 391% - according to the Consumer Financial Protection Bureau. Payday loans are short-term, small-dollar loans typically capped at $500. In debt from your kid’s education? There are options How payday loans work If you’re trying to get out of payday debt, there are ways to break the cycle, especially if you know where to turn in your community. Though these loans may be advertised as a way to cover a one-time emergency cash shortage, borrowers often use them for important recurring expenses such as rent and utilities, and the cost can be exorbitant. Payday lenders operate in 32 states, and about 12 million Americans use payday loans each year, according to research from the Pew Charitable Trusts. “I experienced homelessness once, and I didn’t want to be homeless again, so I had to keep taking out just to pay my rent and my light bill,” she says. She remembers the process as quick and easy - she signed on the dotted line, got the cash and was out the door within minutes.īut when it came time to repay, the combination of her monthly bills, plus the triple-digit interest rate on her payday loan, meant she was short on cash again, so she took out another loan.Īs the amount she owed ballooned, Shannon says she soon felt trapped by her debt. ( NerdWallet) – When Minnesota resident Sherry Shannon was short on cash after her car broke down in 2013, she turned to a storefront payday lender for a $140 loan.
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