Debunking Five Common Myths About Payday Loans

Myths can be a lot of fun – who doesn’t want to ponder a loch ness monster’s location or imagine a mermaid sunning next to you at the shore? But sometimes, myths can serve to blur the lines between fact and fiction. In fact, many myths are often confused as facts altogether, which can lead to a lot of misinformation floating around. For example, ever heard the myth that bulls detest the color red? You might be surprised to learn that, in fact, according to the American Survival Guide, they’re red-green colorblind! Talk about fact vs. fiction! Today, we’re dispelling some retail financial mysteries of our own and diving in to debunk five of the most common myths about payday loans. Olé!

Myth:
Payday loans all have outrageous interest rates.

Reality:

You may have heard that payday loans always have astronomical interest rates—like, for example, an annual percentage rate (APR) of over 350%. Sounds like a pretty large number, right? But don’t let the numbers fool you – it’s important to keep in mind what APR means, and how it actually applies to a payday loan.

The Federal Truth in Lending Act (TILA) requires that all lenders disclose the fees of the loan in terms of APR. However, APR is the annual percentage rate. Key word here: annual – so in other words, it represents the interest charged over the course of one year. Payday loans, by contrast, do not have year-long loan terms. Rather, they are designed to be short-term loans. 

Shorter term loans may look like they have large APRs, but because they are not designed to continue over the course of a year, the rates may be very reasonable. Here’s an example:

Imagine that you are having drinks at the newest craft brewery in town with your college friends. As you are leaving, you realize that you left your wallet at home (Oh no, how embarrassing!). You ask one of your old friends to front you the money, and he agrees, paying for your $8 overpriced fancy beer. You promise to pay him back, and two days later, you toss him a crisp $10 bill, telling him, “Keep the change; consider it interest.” 

Did you know that the “loan” from your friend would have equated to an APR of 3650%!? It sounds like an outrageous APR, but you might feel more willing to pay it off because it was a short-term loan, not a year-long loan. If, at the end of the year, your friend had asked you for $375 for buying you that $8 beer… well, you may decide you need some new friends.

Similarly, a $100 payday loan over the course of 14 days with a 391.07% APR might sound very expensive—but it really just represents a $15 fee.

Myth:
Payday loans are a waste of money.

Reality:

Let’s face it—no one loves paying fees or interest. However, fees and interest can be a wise financial decision if you are able to get utility from it. What does that mean? Well, borrowing money is like renting money. If you rent money, you are able to use it for two weeks (or whatever your loan term is) and then pay it back. Think of it in terms of renting a car; when you a rent a car, you pay a fee, and you are able to use that car for two weeks. At the end of the two weeks, you have to return the vehicle (we’ll miss our new wheels!), but you were able to use the car for those two weeks when you really needed it. See, borrowing isn’t so bad – and there are plenty of situations where renting a car makes sense. There are also some situations where taking out a payday loan (i.e. renting money) makes sense, too. For example:

Imagine that you are throwing your daughter the most amazing quinceañera and you’ve budgeted and planned ahead for every expense, including a nice, cozy venue. However, due to COVID-19, you need to find a bigger party hall (social distancing, anyone?). On top of that, the hall needs a deposit today to hold it until next week. Well, you’re going to get a refund from the first venue … just not today, and you don’t get paid until next week. Sounds like “renting” some money now, for a small fee, knowing that you’ll have the expense covered later, is a very good idea indeed. One less thing to worry about, so you can focus on your main problem: how your little girl is growing up WAY too fast!

Myth:
Payday loans have hidden fees.

Reality:

The Truth in Lending Act requires that lenders provide up-front, full disclosure of terms and conditions.  All of Moneytree’s loan agreements contain clear disclosures regarding each fee that applies to your loan, and Moneytree’s friendly Team Members are always happy to walk you through your loan terms and answer any questions you might have. We firmly believe that fees should never be a surprise to anyone – no sneaky business here! When you take out a payday loan (or any loan) it is important to read all the terms of your loan agreement before signing, and ask questions to make sure you understand its terms.

According to a 2016 study from the Tarrance Group, almost all payday loan borrowers surveyed said they completely understood the fees associated with their payday loans, including all the charges they would incur if they did not repay on time. Specifically, the study concluded that “[v]irtually all borrowers (96%) say they completely understood how long it would take to pay back their loans and the finance charges they would pay before taking out the loan.” Borrowers also reported that the lender clearly explained the terms of their loans. And, a whopping 72% said that they believed that “they received better treatment from their payday lender than from a bank or credit card company.” Now, that’s transparency and great customer service!

Myth:
Payday loans are only for poor, uneducated people without access to bank accounts.

Reality:

Talk about harsh judgement! The reality is that most people seeking payday loans are middle class individuals with full time jobs who happen to have an emergency, or some other unexpected situation, that requires quick cash that they might not have on hand. Lenders like Moneytree will require proof of income and an active bank account before allowing loan applicants to borrow. There are many reasons why it may make sense to get a payday loan. For example:

Many of us have hobbies that we are passionate about! Imagine that your particular hobby is buying and fixing up old cars for a profit. One day you’re driving down the street and you see the vintage muscle car of your dreams with a $700 price tag on it. Well, you could go to the bank and try to finance that purchase, but let’s face it— most banks are not interested in lending people $700. Instead, they’re likely to tell you to apply for a credit card, which would mean waiting for approval, waiting for the card, and all those additional fees. By the time it’s all said and done, your dream car might have already gone poof – plus, you’re not even sure that the seller of the car would take a credit card in the first place! It might make good financial sense (and good business sense) for you to take out a payday loan and lock down that dream car before someone else buys it. And it’s not like your banking relationship is wasted either, since it is a qualification necessity for a traditional payday loan^[1] from Moneytree!  

Myth:
All payday lenders aggressively coerce borrowers into paying back loans.

Reality:

While some payday lenders may use aggressive collection tactics, reputable payday lenders like Moneytree use lawful and fair means to collect past due payments. Moneytree prides itself in communicating professionally and respectfully with all of its customers, and also provides resources for its customers (for example, free courtesy date extensions) who are unable to make their payments on time. We get it, things happen, and we have your back! The vast majority of people who take out a payday loan repay their loans on time because it’s the right thing to do and because they (like any of us) want to maintain a good relationship with their lender to maintain their access to future credit. But, at Moneytree, if you’re in a bind and need to discuss a date extension or reasonable repayment terms, we are here to help. 

---

There you have it! Myths are fun when they are about things like mermaids and dragons, but not so fun when they lead to misconceptions about the financial tools that are available to you. To learn more about payday loans and how Moneytree might help you reach your goals, visit us in Branch or online.

---

[1] Signature loans are also available in some Moneytree markets.