Payday Loans and Other High Interest Loans

People run short on money before payday because they don’t budget for monthly expenses (rent, insurance, car payments, etc.). People also run out of cash because of unexpected expenses, (car repairs, health problems, or other unwelcome surprises). To avoid this, set aside a small sum of money from each paycheck for emergencies. Over time, you’ll have quite a bit set aside in case the unexpected happens (and it almost always does!). Make a monthly budget for regular expenses andstick to it in order to limit your spending.

Try never to take out payday loans, installment loans, title loans, or tax refund appreciation loans. These are expensive, high-interest loans, used by desperate people who did not budget or save for emergencies. Compare these interest rates:

  • Interest rates on cars are often in the single digits, 9% or less, about $37 a month on a $5,000 car loan for the interest.
  • Interest rates on credit cards often range between 10% and 28%.
  • Interest rates for payday loans, title loans, and what are now called "installment loans" typically cost between 400% and 550%!

Some loans are designed so that you never pay back the original amount borrowed (the principal), which means that you continue to pay a huge finance charge on money you borrowed and spent a long time ago.

Example of a Payday Loan: Peter borrowed $300 from a payday lender two years ago. He still owes the $300, and has paid back over $2,000 for the $300 loan. He pays $75 per pay period in fees but still owes the $300. Peter is not a made-up character; this example comes from Professor Martin’s research on payday lending in New Mexico.

Example of a Title Loan: Terry pays $400 a month on a $3,000 title loan, but the $400 only covers the interest on the loan. After paying $2,800 in interest after eight months she still owes the original $3,000. She is required to pay $125 a month for a mandatory road-side assistance plan, and one time had the car repossessed (taken away) for non-payment. It cost $220 to get the car back. She has paid much more than $3,000 and still owes $3,000! The car will be repossessed if she cannot make the payments. At these rates, she’ll likely lose her car and still owe money on the loan!

Example of a Tax Refund Anticipation Loan: Tonya walks into T & S tax service and has them file her tax return. Tonya should be entitled to a $4,000 tax refund, and would receive the money within two weeks, but instead she accepts T & S’s offer to give her a loan on her refund. She walks away with $3,500 instead, thereby paying $500 for a two week loan. See UNM Law School Tax Club for free tax assistance.

Information on these types of loans, and how you can avoid them and get a full tax refund, see Bankrate.com

Are these kinds of loans legal?

Despite the expense, the huge debt trap, and destructive, these loans are legal in many places. New Mexico has not been successful in regulation of this industry because the industry keeps changing its products to avoid the new laws. This leaves the consumers to watch out for themselves.

Loan customers are not always aware of the full cost of the loans when they take them out. Many do not understand that they just pay fees and never pay off the loans. Many people think that they’ll be able to pay back the loans quickly, but most actually can’t. And NOBODY, that’s right, nobody, thinks they’ll pay $2,000 or more, to borrow $300, and still owe $300!