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1 Alarming Financial Trend in America

According to a report by the Federal Reserve, there are many
positive trends in personal finance in America. In general,
people are borrowing less and saving more, which is definitely a
positive sign that we learned a lesson from the financial



However, I saw one statistic that is rather troubling. Over
the past several years, the percentage of Americans who use
payday loans has risen significantly. Just how many people use
these dangerous loans, and what makes them so bad?

What exactly is a “payday loan”?

The name is somewhat misleading, because these loans don’t
necessarily need to be linked to the borrower’s payday. The term
“payday loan” refers to a relatively small, short-term, unsecured
loan, and is sometimes also referred to as a cash advance loan or
payday advance.

There is typically no credit or background check required,
just a verification of employment and a bank account. In the
traditional payday lending model, the borrower writes a postdated
check to the lender for the full amount of the loan. The borrower
is expected to repay the loan in person, or else the lender can
redeem the check.

In recent years, the concept of an online payday loan has
grown in popularity, which could explain some of the recent surge
in payday lending. The borrower applies online, and then receives
funds via direct deposit, and the funds (plus any interest and
fees) are withdrawn on the agreed-upon date.

Growing in popularity

According to the latest
Survey of Consumer Finances

;(link opens a PDF) from the Federal Reserve Board of
Governors, the percentage of Americans who have taken out a
payday loan over the previous year nearly doubled from 2.4% in
2007 to4.2% in 2013.

Although this is still a low percentage on an absolute basis,
it’s way too much. Quite frankly, no one should take out a payday
loan unless it is a last resort.

The alarmingly high cost of payday lending

Now, the concept of a payday loan isn’t necessarily a bad one.
After all, sometimes people need to pay for things a few days
before their next paycheck arrives. The problem is how much some
payday lenders will charge their customers.

Due to the short time frames involved, the real cost of these
fees is somewhat hidden. Let’s say you take out a $500 payday
loan to be paid back in two weeks (14 days). If your lender
charges a $60 fee for the loan, which is actually on the low end,
it equates to 12% of the principal amount. On an annualized
basis, this is an interest rate of more than 300%.

In other words, if you get a new payday loan for $500 every
two weeks for a year, you’ll pay more than $1,560 in just
interest, even though you will never owe more than $500.

So it’s no wonder that payday lending is illegal (or severely
limited) in many places throughout the U.S. In fact, 18 states
have either banned,or severely limited, the amount of interest
that payday lenders are allowed to charge . In an extreme
example, payday lending is specifically forbidden in Georgia and
is actually a violation of racketeering laws. New York and New
Jersey prohibit payday loans as well.

Other states still allow payday loans, but with specific
terms. For instance, Oregon permits payday loans with a one-month
minimum term and a 36% maximum annual interest rate, plus a $10
fee per $100 borrowed.

However, the other 32 states have all passed legislation
authorizing payday lending with absurdly high interest rates. For
example, Florida allows a 419% APR on a 14-day loan. Alaska is
even worse, as borrowers can expect to pay an annual rate of
520%. And Louisiana allows for interest charges and fees that
combine to produce a staggering 780% APR.

Avoid at all costs

Payday loans are about the worst place you could turn for your
borrowing needs, aside from actually going to a loan shark or
engaging in some other illegal activity. It’s alarming that so
many Americans turn to this kind of loan when they need some
quick cash.

Bank loans, borrowing from friends and relatives, and even
running up your credit cards are all better alternatives. Avoid
these loans and their ridiculously high expenses at all costs,
and over the long run you’ll keep a lot more money in your

Invest smart, and you’ll never need to use a payday

The smartest investors know that

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1 Alarming Financial Trend in America

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1 Alarming Financial Trend in America

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