Money Rehab with Nicole Lapin - The Ugly Truth Behind Payday Loans

Episode Date: June 17, 2021

Nicole dives into the ugly truth behind payday loan and check-cashing places… and explains why there really is one on every block. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. We've all been there.

You're late for work. You spilled a little coffee on your favorite shirt while you're rushing out the door and scrambling to the car. And when you go to turn on the ignition, nothing. Nada, zippo, zilch. the ignition, nothing. Nada, zippo, zilch. You might have to call a tow truck or get your car to somehow limp over to the auto shop. But if you're new to money rehab, you might not have an emergency fund built up just yet for those repairs. So what do you do when you get stocked with sudden bills and you have no way to pay for them? Money rehabber Noah has this question. Hey, what's up, Nicole? So lately,

money's honestly been a bit tight for me. And I'm about to fall short on my payment for my car about a week before I get paid. My cousin, though, he was suggesting hitting up one of those payday loan spots in the neighborhood to cover, you know, the loan. First, I was thinking, yeah, that's a great idea. But then I thought about it. and I don't really know what a payday loan even is. And I guess I'm a bit skeptical at this point. Do you think this is a good idea or should I just look for another option? Thanks. Big fan of the show.

Yes, Noah, you need fast cash. Some might even suggest a payday loan. But are they the best option? If you Google the term payday loans, you'll see the suggested phrase, where can I borrow money instantly? Payday loans are short-term loans that you can take out against your paycheck. The idea is that you take one out for a week or two just until your next payday. See what they did there?

If you Google the term payday loans, you see the suggested phrase, where can I borrow money instantly? Sounds awesome. If that were the reality. To hear them tell it, it all sounds so simple. You just walk to the nearest payday loan place, take 20 minutes to fill out some paperwork, and lo and behold, $300 or even $1,000 appears in your checking account. Then you simply pay it back the next time you cash your paycheck from work. And when I say walk to the nearest payday loan place, I really mean it. There are more locations of payday loan shops in the US

than there are Starbucks. And from where I'm sitting, I could walk to two different Starbucks locations with a 10-minute stroll. These things are everywhere. And if you've been listening to Money Rehab for a while, you probably see a big fat red flag. That red flag should tell you, just like I've told you about a lot of things, that these places are not charities. They are for-profit machines. They are not there to help you. What they are there to do is run an extremely profitable business that notoriously has been hard to regulate. And then when state governments do try to regulate them, these payday loan spots often change the way they do business just to stay in the game. But the end result is always the same. More of your hard-earned money goes into their pocket.

The craziest part is that they've only been around for 25 years and they are spreading like crazy. According to one study, one in 20 people have used a check cashing or payday loan service to get them past a financial hurdle. These companies overtly advertise to low income families because people with less margin in their budgets are their bread and butter clientele, which is beyond messed up. In my opinion, there is a very special place in hell for people who get rich on the backs of those who have the very, very least. But why exactly are these loans so devious? Let's unpack this for a second. You know I tell you to steer clear of credit cards with the super high APR, right? Like some department store cards, which can go as high as 26%, are not in your best interest. But what about 500%? Or 750%? Or even a 1900% APR?

Wait, what? Yeah, you heard me correctly. A 1,900% annual percentage rate. How can this be? Let's break it down. Let's say you need just $350 to get you over a hump. The auto technician says your alternator's out and you happen to be running a little short this week, let's say. The payday loan place near your house is asking for a 15% interest rate on the loan. So you'll pay an additional $52.50 to the

lender in order to take out that loan. That's similar to a typical credit card APR. So while that's pretty steep, you kind of figure it's no big deal, right? Sure, you're absolutely right, in the event that you're able to pay off the loan right away. But you know what they say, when it rains, it pours. If you're not able to pay off the loan right away. But you know what they say, when it rains, it pours. If you're not able to pay off the loan in two weeks or less, you're very, very wrong. Remember, an APR stands for annual percentage rate. But that 15% the payday loan place is asking for, that's not annual, that's just their starting point. And it grows from there. One study showed that three quarters of all payday loans are taken out by people who need more than one loan between paydays, which is a cycle that multiplies

viciously. Missing payments is not only bad for your credit, but the amount you owe to the loan place could wind up being many, many times the amount of the original loan. It's like how you have to get to work to make the money to fix your car. But since your car is broken down, you can't get to work until you have the money to fix your car. But that doesn't change the fact that your car still needs an alternator, does it? Studies show that people who need to pay back payday loans wind up doing all of the other things they might otherwise have done to get the money in the first place. Asking family, pawning their guitar, or selling things online. So here's today's tip you can take straight to the bank. Do anything other than take out a payday loan. Beg, borrow, okay maybe don't steal, but go back to episode 34 of this podcast,

Strange Ways to Make Money. And then when you're back on your feet, go back and listen to episode 31, which shows you the ropes on how to create an emergency fund. So you can walk right past that payday loan place and grab yourself a latte at the Starbucks next door. Money Rehab is a production of iHeartMedia your host nicole lappen our producers are morgan lavoie and katherine law money rehab is edited and engineered by brandon dickert with help from josh fisher executive producers are mangas hatikader and will pearson huge thanks to the og money rehab supervising producer michelle lam, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all. You spend the money, money, money, money, money, money. You spend the money, money, money.