Crack is pretty bad. (So I’m told.) A refined form of cocaine that can be addictive after the first use, it requires its addicts to be in continuous search of the next high. Because it is so addictive, a crack dealer will sometimes give a purchaser the first hit free. The dealer knows the victim will be willing to empty his wallet when he comes back for more. But often the next high is elusive because of the large amounts of fake crack on the streets. So an addict will often buy much more crack than he needs, in the hope that one of the hits will give him the high.
I was driving through a shopping district the other day and saw a sign for a payday lending institution. The sign, out by the edge of the road so all passersby could see it, said simply, “First loan free!” I assume they meant interest free, and not that they were just going to give you a bunch of money. But regardless, why do you suppose a store like that would give you your first loan free?
Payday lending “customers” look a lot like addicts. The first loan doesn’t cost anything, delivers instant relief, and helps you forget about your troubles for a while. But what happens when payday finally arrives? So does the bill for the loan – you have to pay that loan back. But because you have a hundred other bills and credit cards due, you’ll have to decide what doesn’t get paid this time. Are you going to quit buying food? Gasoline? Will you quit paying the rent or mortgage? No, you have to have those. But hey, here’s a friendly offer from the payday lending store offering to roll your loan over for just another small fee. Why, it doesn’t hardly cost anything, and it will provide another instant hit of relief and forgetfulness.
But rolling the loan over doesn’t provide quite as much satisfaction as it did just two weeks earlier. You’ve accumulated a few more bills and a little more debt in that time, and the original amount you borrowed may not be enough. So you borrow more. Hopefully, you can see this vicious cycle before it happens, and not after you’re already in it.
The addiction-like qualities of payday lending aren’t its only problem. There’s also the high cost. You could borrow $100 for two weeks and pay only $15 for the privilege. That doesn’t sound too bad, and most lenders count on customers thinking that fee is OK. But quick math tells you that works out to 15% interest. 15% is pretty high, compared to other sources of credit, but it’s even higher when you consider that rate is for a two week loan. If you kept rolling the loan over for an entire year, turning the two week rate into an annual rate, you would be paying 391% interest on that $100 loan.
Just like crack, payday lending can ruin you. Don’t let it. Stay far away. Don’t do crack.
This article originally appeared in the November 5, 2008, edition of the Greenhorn Valley View.