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With lawmakers unable to agree on an extension of federal spending authority, the U.S. government went into a partial shutdown this morning, leaving hundreds of thousands of federal employees without a paycheck.
Essential federal employees will continue working, but others have been furloughed. While an estimated 800,000 government workers had their jobs and incomes put on hold today, their financial obligations were not, and they’ll have to figure out ways to pay their bills.
There are a few options for people in this situation: withdrawing money from an emergency fund, taking out a personal loan, using a credit card cash advance, putting purchases on a low-interest credit card or taking out a payday loan.
Using an emergency fund is the best option. This is the sort of situation it’s designed for, but not everyone has one. Similarly, not everyone can qualify for a personal loan, and some people don’t have credit cards.
While payday loans carry risks and can be very expensive, they’re available to most people. In a situation where the choice is between defaulting on financial obligations and taking out one of these high-interest loans, a consumer will understandably go for the payday loan. In fact, with the government shutdown looming, USAA told its members it would offer zero-interest payroll advances to help them meet expenses.
According to a report from the Pew Charitable Trusts, 12 million Americans take out payday loans each year. The high-interest, two-week loans are usually less than $500 and are intended to cover a borrower’s costs until his or her next payday.
However, the same report states that the average borrower ends up indebted for five months for a $375 loan and paying $520 in finance charges.
This is how that all works out: A borrower needs an infusion of cash and is attracted to the quick payout and short term of the payday loan. At the end of the term, they see the choice between paying the debt in full, which they may not be able to afford, or paying fees to extend the repayment period, which results in a cycle of debt they likely wanted to avoid in the first place. Only 14% of borrowers can afford to pay the full amount.
The Consumer Financial Protection Bureau released a study on this aspect of payday loans earlier this year, saying the financial tool frequently transitions to a long-term debt burden.
At the same time, a majority of payday borrowers said the loan provided the relief they needed, even if they found themselves in debt longer than they wanted to be. For those who get caught in the payday loan debt cycle, there are a few options.
Depending on the lender, an Extended Payment Plan may be available, which extends the repayment period without extra fees. While 75% of payday borrowers rely on the lender for loan information, independent research will help a consumer make the best decision, if he or she determines a payday loan to be the best financial option at that time.
It may also be possible to negotiate a debt settlement, but perhaps the most viable option is to scrimp as much as possible in the budget in order to pay the loan back. It’ll be cheaper in the long run.
Image: iStock
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