If I said, "Don't rob Peter to pay Paul," you would probably understand that I was warning against making a desperate move to fix a financial problem that often makes a bad situation worse.
Yet millions of people do just that when they get a payday loan.
These are small loans that a borrower promises to repay with the next paycheck or benefit check.
Stop and think about this.
If you can't pay your expenses with your current paycheck, how is borrowing from the next one going to help? Yes, it may solve a problem today. But if you can't repay the loan, you're likely to create a long tether to a financial product with expensive fees.
Yet, I understand why people get them. It's quick cash. It's easy to get if you have a bank account and income. And if you're in a financial jam, the fees can seem reasonable. A charge of $15 to borrow $100 doesn't seem extreme or exploitive to borrowers trying to avoid having a service turned off or catch up on their rent or mortgage.
But when fees are annualized, they often amount to triple-digit interest rates or more. I've seen payday loan contracts with four-digit interest rates. Payday lenders are required to tell you the finance charge and the annual interest rate (the cost of the credit) on a yearly basis.
Defenders argue that these loans provide a service for people who need short-term cash. And they are right. Many people feel they are being rescued. Until things go wrong. And they do, for a lot of folks.
The Pew Charitable Trusts says the average loan size is $375, but most people can only afford to pay $50 in a two-week period after paying other regular expenses. "Repeat borrowing is the norm, because customers usually cannot afford to pay the loans off on payday and cover their other expenses, so they repeatedly pay fees to renew or reborrow," a 2013 report from Pew said. "Lenders depend on this repeat borrowing, because they would not earn enough revenue to stay in business if the average customer paid off the loan within a few weeks."