The Indy Star recently reported that more middle class American families are seeking payday loans during these tough economic times. In some states, the median income of borrowers has risen to $43,000, which is above the national median income.
However, Dave Ramsey and many other consumer credit counselors warn people to avoid payday loans like the plague. Why you ask? Because you could get caught in a debt trap.
Well, you could cut your finger from chopping vegetables, and you could get a brain freeze from eating ice cream, but does that mean we should avoid these things? Instead of trash talking payday loans, Dave Ramsey and his crowd should be properly educating people about them.
For example, payday loans have an APR of about 350%. What does this mean? It means for ever $100 you borrow for two weeks, you are charged $15. A fifth grader could tell you that this means you pay 15% of the loan in fees. So a payday loan out for two weeks will cost you 15% of the principal in fees.
Does a 15% fee sound like a lot to you? Is there any reason to think that 15% is predatory lending? The problem comes when people borrow too much,so that when the due date rolls around,they just pay the 15% fee, not the principal and the fee. This extends the loan another two weeks.
Getting caught in that cycle can lead to debt. But the best way to avoid that isn’t to avoid payday loans and ban them. The best way to avoid debt with payday loans is to understand payday loans. And it seems that as times get tougher financially, more Americans need short-term credit options. Payday loans are a perfectly viable option for any responsible borrower.
