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Sergio 23-02-09 03:16 view354 Comment0

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Do Payday Loans Ever Make the Financial sense?

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Do Payday Loans ever make the Financial sense?
Taking a payday loan is often more than treating the symptoms than treating the disease. Many people have options.
Written by Hal M. Bundrick, CFP(r) Senior Writer | Personal Finance, financial planning, investing Hal M. Bundrick is a personal finance writer as well as a NerdWallet authority in money issues. He is a certified financial planner as well as a an ex-financial consultant and the senior specialist in investment of Wall Street firms. Hal has advised businesses, families trusts, non-profits and nonprofits as well as established group retirement plans for employees in The South and Midwest. Hal currently focuses on making financial topics understandable and jargon-free.





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There is ever a reason to take advantage of the option of a payday loan? Paycheck-to-paycheck living can bring you down. Spending every penny of your earnings leaves no room for error. While this type of behavior can be thought of as a hallmark of the poor, studies have shown that some "hand-to-mouth" families are relatively wealthy. But the majority of their assets aren't readily or easily converted into cash, like a home and retirement accounts. Some people may be confronted with a pressing need for funds and there is no way to access the money fast.
A short-term high-interest loans, which are usually backed by a borrower's post-dated check -- may offer an attractive alternative. Although these loans are especially dangerous for those with a limited financial resources, there may be times when resorting to a payday lender seems to make sense. But, this is typically as if treating the symptom than treating the underlying issue.
Who takes out payday loans?
Although living on the edge is a financial condition that affects Americans across the wealth spectrum however, the U.S. Consumer Financial Protection Bureau (CFPB) in Washington declares that the median earnings of a payday loan borrower is less than $23,000. According to the Center for Responsible Lending (CRL) determined the typical borrower is white female and between 25 and 44 years old.
Five socio-economic groups had the "highest odds" of getting an payday loan: individuals without having a degree from a university, African Americans, people who earn less than $40,000 per year and those divorced or separated According to CRL located at Durham, N.C.
It's easy to find, but is it worth it?
If a cash-flow crisis arises, payday loans -- similar to simple to get. In most cases, a person who needs to borrow money only needs to show proper identification, proof of income and an account on their personal bank to qualify. The lender typically expects either the post-dated check or access to the borrower's banking account to ensure repayment. Credit scores aren't examined and the ability of an applicant to repay the loan considering other obligations and costs isn't taken into consideration.
In exchange for access to much-needed cash charges can be hefty -- ranging from $10-$20 per $100 borrowed over two weeks. The annual percentage rates (APR) is typically close to 400% or higher. That has led to outright prohibitions on payday loans or restrictions on payday loans in 22 states which include limits on the amount of loans a consumer can avail in a calendar year.
The majority of borrowers don't have the means to repay the debt as well as pay for other expenses of daily life. A string of short-term, costly loans typically result in such situations, trapping many of them at the expense of over a hundred dollars total fees, the CFPB declares. Consumers who made use of payday lenders usually did so frequently over a period of 12 months, the bureau said in the study it released last year. Nearly half of the borrowers took out more than 10 short-term loans during the course of a year.
Can payday loans be a low-cost option?
But when facing a cash situation, what's a person to do? Incredibly, Moebs Services, an economic research firm based out of Lake Bluff, Ill. states that payday loans can be a low-cost solution, compared with alternatives such as the possibility of overdrawing your checking account.
Banks are raking in increasing fees for overdrafts, a reflection of the pressures that families living on their own have to endure in order to survive. The revenue stream was course to increase by 1.6 percent to nearly $32 billion last year Moebs estimates.
Using a $100 example and comparing fees for payday lenders with the typical bank fees , Moebs breaks down the amounts:
Payday loans and $18
Credit unions, $28
Banks and thrift stores, $30
Wall Street banks, $35

"If price is a concern for your money needs, then payday lenders provide the lowest cost for the loan,'' Moebs concludes. But the consumer agency says the majority of customers -- or nearly 10 million Americans will can roll over the loans every so often and most of the time, multiple times in a year.
Solutions to payday loans
Faced with a sudden cash need and need to pay for it immediately, a payday loan may be a viable temporary solution. However it is important to note that the Pew Charitable Trusts in Philadelphia revealed that over two thirds (69 percent) of payday loans are taken out to cover recurring costs that are commonplace in everyday life -just 16% taken out for emergencies that were unexpected. This reveals the core problem: the family that lives on their own, living beyond its means, is digging itself deeper into debt when it uses the services of a payday lender.
Asked what they would do if they weren't able to get payday loans, 81% of respondents said they would cut down on their expenses, as per a 2012 Pew survey. For wealthy and low-income households alike who live from paycheck to paycheck, cutting back on expenses is one way to end the cycle of increasing debt.
Check out the test below to find out your other alternatives to payday loans.



About the author: Hal Bundrick is a personal finance journalist and a NerdWallet authority in money matters. He is a certified financial planner and former financial advisor.







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