People I consult for financial matters and who have used the PayDay loans system have one thing in common with chain smokers. Both groups need strong determination and follow through to be able to get out of the rut.
PayDay loans, sometimes also called Advance Lending, have increased tremendously in the past five years. Simply put, PayDay means loans against your wages or salary paid hourly, weekly, bi-weekly or monthly. The service simply advances a percentage of the amount you write against the bank account where your wages or salary are deposited, prior to actual deposit date, but after the last day of the period for which you are owed these wages. In other words, you are trading a guaranteed amount of cash which you will receive in a few days, maybe a week or fortnight later, for cash which is advanced to you now against that guaranteed future deposit.
So far it is fine. You get cash before your normal pay day, and don't have to actually "borrow" since the check ought to be good against the deposit.
The catch is that for this relatively minor service, PayDay type shops charge you a huge fee, almost a punitive fee. Which is why consumer activists, fair loan proponents and even some attorney generals of states are looking hard at PayDay practices.
To show you how much you will be paying Pay'Day if you shop there, consider this. Normal PayDay fee for a $100 advance against your future paycheck is $15. Typically you get the money 2 weeks before payday. At this rate, your APR (annual percentage rate) is 391%, but the EAR (effective annual rate) which compounds the fee since you lose it every two weeks, is overe 3000%!!
I know many illegals, particularly from Mexico, use PayDay because of fear for their status or because they need the money. However, with the recession, loss of steady job and bills piling up, there are many legal residents and American citizens who have had to use PayDay. But paying 400% interest, and 3000% compounded interest, makes no sense at all. The problem is, like termites eating into your home, one bite at a time, you do not feel the $15 or $30 that you leave at the PayDay counter every one or two weeks. And you get addicted to living beyond your means because you are living from pay check to pay check.
Here is how to get off this toxic practice.
1. Prepare a budget. Be very conservative and stickt to it. Only in dire emergencies (like medicine for your child) should you go off the budget.
2. Take a hard look at all your waste expenses. If you are a PayDay customer, I have some harsh advice for you. You should not be shopping for anything other than groceries and necessacities, and even that shopping should be for what you can eat and use that week, and consisting of healthy and value based brands. Stop buying expensive designer brands, and go for store or generic brands. You will save a lot. An example. If you are a man, and use razors, a major brand costs $2 per razor, whereas equally good Wal-Mart brand you can buy for $1.
3. Shop at discount stores like Costco and Aldi.
4. Stop the habit of taking out your car and driving everywhere. If you can walk or take the bus, do it, even if you own the car because you will spend less on gas and maintenance and live more healthily.
5. Drop hanging out with friends who splurge. The peer pressure will ruin your pocketbook.
6. Absolutely do not pay retail for non-groceries. Shopping for dresses and apparel should be a rare luxury.
7. Take pride in saving, and not in spending.
8. Eating out, and drinking coffee from that expensive franchise. Make your own coffee (costs 10% of what you wil pay at the coffee shop) and start cooking your food--make it an adventure. A chicken dish at a restaurant costs $19. The one you make at home---$4. Not to mention wine which is marked up 300%!!
In other words when you live frugally, you will find, as your savings go up, you will have peace of mind, financial security and best of all----you will leave PayDay for those who did not heed these words of advice.
Good luck and happy savings.
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