The ugly truth about payday loans

Families without bank accounts are on the rise, according to a survey by the Federal Deposit Insurance Corporation (FDIC). The agency reported that one-quarter of households in the U.S. lack a checking or savings account.

Unfortunately, many of these consumers are turning to high-interest alternatives, such as pay-day loans, title loans and pawn shops, to satisfy their banking needs. And while these may be convenient options – the cost of convenience is staggering.

According to Consumers Union, the fees for payday loans can be as much as $17.50 for every $100 borrowed. But it’s the interest rates that are downright dirty!

For example, the interest rate for a one-week loan is more than 900 percent. You read that right – nine hundred percent. And if you’re interested in a two-week loan, you’ll have to pony up 456 percent.

The payday industry justifies its business by stressing that they are only used for the occasional emergency. However, that’s rarely the case.

It’s reported that nearly seven in 10 people who use payday loans, rely on them for recurring expenses, such as food, rent, utilities and car payments. In fact, the Wall Street Journal reports that the average customer of a payday lender makes 11 transactions a year. And one can only imagine how quickly the interest on that many transactions could snowball.

So in reality, payday loans actually create more problems than they solve. And who needs more problems?

So rather than resorting to a payday loan, consider opening up a checking or savings account at an FDIC-insured bank or credit union. These financial institutions are beginning to offer more options for small loans, which would be the ideal alternative to using a payday lender.

Plus, opening up an account at a reputable institution will allow you to build an emergency savings account – which should be easy to do, now that you’re not paying triple-digit interest rates.

You should aim to save at least an amount equal to three months of your salary – ideally it should be six months. And depending on the financial institution you choose, your savings will earn interest over time – so your money will be making its own money! It’s a win-win.

Finally, remember that when facing a debt crisis, there is no “quick fix” that’s going to solve all of your financial issues. So anyone promising one should be scrutinized thoroughly.

And if you need assistance putting together a long-term solution to pay down debt, seek out a nonprofit organization, such as MMI, to get you on the right path toward a stress-free financial future!

Jessica Horton is a former copywriter and community manager at MMI.