As you may have heard, Google has joined Facebook in protecting users by banning ads from payday lenders. Payday lenders are companies that lend at exorbitant interest rates to consumers that agree to repay the money with their next paycheck. These interest rates can range anywhere from 400% to 800% APR. Compare this to the 23.53% average APR on a cash advance from a credit card.
According to the Consumer Financial Protection Bureau, payday lenders rake in $8.7 billion in interest and fees every year from unwitting consumers who could easily have borrowed money elsewhere. As a result, federal agencies have started cracking down with new regulations and enforcement actions against lenders for unfair advertising and billing practices.
Personally, I’m in favor of the increased oversight of these predatory lenders. Sure, you could argue that these companies aren’t at fault and that it’s the consumer that needs more education on how to manage their finances. But that’s ignoring the fact that these companies charge at least 17 times more than a credit card company for a loan. For example, let’s suppose Bob borrows $500 for one month at a 400% interest rate from a payday lender. This results in a finance cost of $166.67. Now suppose Bob took out the same $500 in the form of a cash advance on his credit card that charges a 23.53% APR. This finance cost comes out to just $9.80. We already know the vicious cycle of debt that a credit card can create when used this way, and payday loans are an even more dangerous alternative.
So what are our options if we’re strapped for cash? If you have a good credit score, consider opening a credit card that offers a low APR on balance transfers. For instance, the Chase Slate is offering 0% APR for 15 months on balance transfers at no fee if you make the transfer within 60 days of account opening.* Once you open an account, you can ask to transfer an amount larger than the actual balance of one of your existing credit cards. This will create a negative (credit) balance on the existing card, and you can then withdraw that credit in the form of a refund check. After that, just remember to pay the minimum payment each month on your new card and pay back the entire balance before the 0% APR period is up.
If a balance transfer is too much hassle or you have a weak credit score, consider not borrowing at all. You can make daily purchases with your credit card and pay down the balance with your next paycheck.** After all, this method is not that different from borrowing cash from a payday lender. And if you absolutely need more money than you can afford, consider asking friends or family for a low interest loan before considering higher interest (personal loan) options from lenders.
*I was able to take advantage of this offer a few years ago to get an extra $17,000 to pay for law school.
**I like to pay for everything with my credit card even when I have the cash. This way, I rack up reward points while building my credit.