It’s Murphy’s Law that states that anything that can go wrong will go wrong. Your car will break down. Your air conditioning will go out in your house. You will get laid off. It’s very likely that one of these and a long list of other things has happened or will happened to just about everyone. And Murphy’s Law doesn’t wait until your bank account is flush to wreck havoc.
When bound by the “debt trap” and in financial need, many people in the Shreveport area and across the state of Louisiana reach out for assistance to payday loan companies. These lenders offer, usually for a fee plus interest, the money that people need to get them to the next pay check they’ll receive from their employer. In that respect, it’s designed to be a short-term agreement – when the borrower gets to his/her next payday, the loan is paid in full along with interest and fees owed. The borrower is helped out of a financial jam, and the lender receives compensation for their assistance. It’s a win-win, right?
No so fast.
The cold, hard stats on payday loans in Louisiana astonishing. In a 2012 study, Louisiana residents ranked in the top 10 of states in debt per capita to payday loan companies. The annual loan volume from our state was calculated at $1,435,000,000 with annual fees totally $287,000,000. The average annual percentage rate (APR) on these loans – 560%.
To put this into perspective, consider how another, more common lending institution works in comparison: If the average APR for a home loan in Louisiana is around, say, 4.75%, a homeowner borrows $100,000, then in the first year of that mortgage the borrower will have paid around $4,700 in interest to the lender. If the mortgage lenders charged a payday loan office’s APR of 560%, the amount of interest paid would be a staggering $560,000. And that’s just the first year!
While Louisiana does have payday loan guidelines for lenders to follow that keep the maximum APR below 18%, there are loopholes that allow the lenders to make what they probably would’ve made in one year in a matter of weeks. Maximum APR on a 14-day can go as high as 780% on a $100 loan with finance charges of up to 30% of that loan amount. And it’s no surprise that while the maximum loan amount is $350, according to guidelines, that is also the average amount that is borrowed per person.
Per the study, there are more payday loan offices in Louisiana than in Virginia, Minnesota, and Illinois combined. Considering that these three states having a total population of almost 6 times that of Louisiana, it’s clear that payday loan companies want to make quick loans readily available and within short reach of Louisiana’s population in financial need. Given this, is it a mere coincidence that Louisiana is one of the poorest states in the nation?
Yes, desperate times do sometimes call for desperate measures, but the “debt trap” that many get into with payday loans forces those borrowers to pay fees every 14 days that they wouldn’t have paid had they entertained these other options:
- Credit union or bank loans – some banks and credit unions offer short-term loans with manageable interest rates and quick approval for emergency needs. Even if the rate is near the the maximum of 18% allowed annually, it will still be less expensive in the long run.
- Advance from employers – Advances from your place of business are the best ways to fill the financial need, since a true advance is not a loan and has no terms.
- Work out a payment plan with creditors – Dealing directly with debt is the best way to find a solution. Many creditors will work with you to negotiate partial payments until you can breathe again financially.
- Borrow from a friend or relative – If $350 is what is needed, sometimes the best thing to do is to swallow pride and borrow money from a relative or friend.
- Save – Remember Murphy’s Law – that which can go wrong, will go wrong. Budgeting and saving money can help ease the pain when bad things happen. And they most certainly will.