There are many forces out there waiting to take your hard earned money as soon as you earn it. Bill collectors and vendors are the first in line and deserve to get paid because you’ve used their services or bought their products. Other companies however take your money for basically doing nothing.
Last month we talked about check cashing outlets and how they charge you 5% just to turn 1 white piece of paper (a check) into many green pieces of paper (cash). In this follow-up we talk about how many of these check cashing places offer an even more ingenious way to take your money before you even get it – the payroll advance.
A payroll advance is a loan from a pseudo-bank until you get paid. It is supposed to be a short-term bridge (usually 30 days) until you get the paycheck that you know is coming to you. Seems like a good deal on the surface but the problem with the payday advance is how much it costs to get it. Payday lenders typically charge $15 in fees for each $100 borrowed and the fees are charged each time the loan is extended by 2 weeks.
Based on these numbers the effective interest rate on a payday loan can reach over 400%, meaning if you take a year to pay off a $1,000 loan you would be giving the payday lender over $4,000! A loan shark has the decency to charge you 100% for a 2 week loan.
So who is behind this legalized loan sharking? Don’t be fooled by the small size of the payroll lending/check cashing store. This place is not a mom and pop store, it is actually a major corporate bank in disguise.
Researchers at the Public Accountability Initiative estimate that major banks led by Wells Fargo, JP Morgan Chase and US Bancorp provide over $2.5 billion in credit to payday lenders. With this corporate bank funding, these payday lenders then turn around and lend you money at those astronomical interest rates. If you successfully negotiate the payday loan (borrow the money and then pay it back on time) what you have done is given away a chunk of your money in interest and fees to a corporation that quite frankly does not deserve it.
There is absolutely no good reason to get a payroll advance.
Any bill that is late can wait a few weeks until you get your paycheck.
The late fees on a bill won’t cost nearly as much as the fees and interest for the loan
Most of the time if you call a bill collector AHEAD OF TIME and tell them you will pay a little late this month they will waive the late fee altogether.
The worst case payroll advance scenario is getting your credit screwed for life, while the best case scenario is that you gave away 15% of your money for basically no benefit. Either way, you should stop giving away your money to the corporate loan sharks and avoid payroll advances at all costs.
In a December 2009 FDIC study that included 685 banks only 18% had established new branches in low-income areas. In other words, providing banks in underserved minority communities was not a priority for 82% of the major banking corporations.
“Loan sharking is the practice of lending money to desperate people at extremely high and illegal rates of interest.” – Loansharks.com
The effective interest rate of a payday advance loan can be up to 400%
Every 2 weeks that go by where you don’t pay back your loan you are charged a 15% fee on what you owe
“The Predators’ Creditors” from the Public Accountability Initiative has more details on the predatory nature of payroll lenders.
This companion article on AfroDaddy.com, “Avoid Check Cashing Places and Open a Bank Account” talks about the negative financial impact of using check cashing services.
If you want to read an article about making money instead of protecting it, check out "How to Get Rich in America"
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