Payday loans frequently appeal to people who run short of cash or encounter unforeseen expenses. Baby boomers are no exception, so it’s important for this generation to learn more about short-term lending. Greater knowledge on the risks and benefits of high-interest loans can help older Americans make sound financial decisions.
Baby boomers can remember the days when payday lenders only operated stores in seedy urban areas. It’s vital to understand that today’s loans come in different flavors that may disguise their true nature. Some major banks offer high-interest credit under names like “Easy Advance” or “Direct Deposit Advance.” Lenders also use a variety of names and marketing strategies to promote online payday loans.
How it Works
People often take out short-term loans by writing post-dated checks. A lender gives the borrower cash and deposits the check after the loan expires. This payment covers the interest, principal and any extra fees. Baby boomers who lack checking accounts can opt to repay loans with electronic bank transfers. If there isn’t enough money in the account, the borrower must “roll over” the loan and pay more fees. Be aware of the interest rates on these loans and other stipulations to avoid falling into the payday loan trap.
Annual interest rates typically range from 200 to 400 percent. Although this far exceeds the finance charges on most other types of credit, many payday loans only last one to four weeks. An interest rate of 340 percent results in a 13 percent fee on a two-week loan. For example, the interest on a $350 loan would amount to $45.50. Some states let lenders charge fees to verify borrowers’ incomes or perform other tasks.
Many baby boomers use Social Security funds or pensions to pay their bills. Payday lenders frequently accept retirement accounts as valid income sources. Unlike paychecks, these payments usually arrive on a monthly basis. This means that retirees are more likely to borrow money for two to three weeks. The longer duration raises the total price; a 21-day $150 loan costs about $32 at an interest rate of 375 percent.
The Social Security Administration recently stopped sending check payments to seniors. Instead, it directly deposits the funds in their bank accounts. Some lenders have taken advantage of this change by gaining permission to intercept these deposits. This often shortens a loan’s term without reducing the fees. The annual interest rate on a three-day advance at a national bank may exceed 1,200 percent.
Foreclosures and bankruptcies have harmed the credit scores of many older Americans, making it difficult for them to access traditional loans. This is a major factor that helps payday lenders attract baby boomers. These firms can charge high rates because they lend cash to almost anyone with a source of income. However, prompt repayment usually won’t improve the borrower’s credit score.
It’s important for baby boomers to know that many kinds of financial assistance become available as they approach retirement age. Seniors can apply for subsidized housing, tax credits, reverse mortgages, heating assistance and home appliance subsidies. Another option is to withdraw money from a retirement account. Keep in mind that penalties may apply if the account holder remains less than 59.5 years old.
Nonetheless, a payday loan may provide the only practical source of emergency funds. Baby boomers should carefully examine different lenders’ policies. A few firms offer senior discounts, but this isn’t standard practice. The most crucial objective is to find a reputable company like Northcash that doesn’t impose hidden fees or misuse personal data.