Let’s say you’re out doing some yard work this weekend, when all of a sudden some guy rear-ends your car that was parked in the street as he came around the corner. He panics and drives off, and you can’t get a good look at his license plate fast enough. All your neighbors are inside, and no one else saw what happened. As you go over and look at the damage, you find that you now have a smashed taillight and a banged up bumper. The body shop says it’ll take about $400 to fix the damage, which is super convenient because your deductible is $500.
So what do you do? Can you cover a $400 emergency without putting it on a credit card (that you still have to pay with actual money)? Or are you one of the 47% of Americans who would have to sell something immediately, borrow the money, or simply do without until payday? This is the very definition of living paycheck to paycheck: one runs out before the next one comes in, and Rachel and I have both been there. Not knowing how you’re going to make it until Friday is a feeling that far too many people are familiar with, given that we live in one of the wealthiest countries in the world.
Thankfully, we’ve never been in a situation so bad that we had to go to a payday lender, but many people have. With over 300% interest rates, payday loans are quick fixes that lead to big problems. A 2013 study by the Consumer Finance Protection Bureau found that the average borrower from a payday lender earns less than $22,500 a year, and $458 of that goes to fees on the payday loans. That’s underneath the 2013 poverty level for a family of four, and they’re the ones these sharks are preying on most. Ever see a payday loan office in the rich part of town? Didn’t think so. They sell their victims on the idea that if they just take out a payday loan, they can make ends meet and catch up the slack with their next check, except that doesn’t happen. When payday rolls around, a chunk of it is already gone, leaving them with even less for the next two weeks. Rinse and repeat, and you’ve got a disappearing middle class that’s drowning in debt while the loan sharks wait for a meal.
Same Wolf, Higher-Tech Clothing
If you’ve poked around on the App Store on iOS (or, I presume, the Google Play store on Android) recently, you may have seen some new apps being featured that sound awfully familiar. I’ve noticed two so far, Dave and Activehours, that have killer marketing departments shouting happy-sounding stuff like, “You worked today, get paid today!” and “Unlock your paycheck!” It sounds intriguing, and they tout backing from some large employers like Sears and Target. So how does it work? You sign up, give some verification about where you work and what your paycheck normally is, and that’s it. From then on, you can take 0% loans against what you earned each day, and pay them back through an automatic withdrawal as soon as they see your check clear your account. Don’t have enough on that check to pay back what you borrowed for whatever reason? No worries, they’re patient people that will gladly wait until you have the money in your account. But rest assured, they’ll get their money back. Because you wouldn’t want to be that person, would you?
These kinds of apps open the door to a whole new kind of payday lending crisis. No, the interest fees aren’t going to eat up your poverty-level salary, but there’s an entirely different animal lying in wait: anonymous, instant gratification. To get a payday loan, you have to walk inside the office, pass at least some kind of credit check (even if it is just the office cat deciding whether you’re creditworthy), and actually talk to a person. Now, you can download an app and get an advance with no one ever knowing, which makes it sooo much easier.
So, if there’s no interest rate, what’s the harm? First off, you’re still robbing Future You. When payday comes around, your check isn’t going to be as big as it would have if you’d stayed away from these apps. And guess what? You’ve still gotta make it to the next payday, but now you’re behind the 8-ball because you’ve got less money to use. Secondly, you’re treating the symptom, not the disease. I get it. Sometimes, stuff comes up and you need to find a solution fast. But when that solution is painless, like tapping in some numbers on a phone app, you don’t force yourself to learn and prepare better for next time. And when you don’t learn, you don’t grow.
I hope these two apps are a flash in the pan like so many other financial tech apps on the market. But something tells me I’m wrong. I feel like this sort of appeal to our intolerance for delayed anything is going to catch on, and will ultimately drive a deeper chasm between “the wealthy” and the rest of us. Don’t believe me? Check out this post from Liz at Chief Mom Officer, where she writes about three apps that were covered in the Wall Street Journal, of all places. If they’re pushing these things, people are going to use them. After all, scammers and swindlers have always been around, and the most successful ones are the ones that convince their victims that they’re helping make life easier. Encouraging you to use the future to pay for today’s purchases is not helping you. It’s keeping you trapped in your job, and prevents you from ever reaching beyond your current financial situation.
Live Boring, Live Better
Isn’t it exciting when it’s Tuesday, and your bank account is at $7.43? Don’t you just get a rush not being able to remember what your gas tank is at, or if you’ll be able to make it to work the rest of the week? It’s great, right? Nah. I want you to live a more boring life. I want you to not even know when payday is, because you’ve got your bills planned out for at least a month in advance. The people behind You Need A Budget call this “aging your money,” and it’s the key to never needing to set foot in a payday loan office or finger on a payday advance app again. The idea is to use last month’s (or paycheck’s if you’re just starting out) money for this month’s obligations.
Yeah, it’s going to take some work to get the ball rolling, but once it starts, it can make life so… boring. You never get the thrill of overdraft fees or the intrigue of strange people calling you from collections agencies. To do it, you have to cut lifestyle expenses way down. No cable, no eating out, no new shoes for a while. You have to live below your means instead of bumping up against or exceeding your means like these apps try to encourage you to do. Your friends might not like you very much for a couple weeks, but they’ll come around once you’re able to cover your part of the restaurant tab again! Turn it into a game, where the more you save, the more you can treat yourself the next paycheck. Made it to payday with $100 in the bank? Spend $10 on something you wouldn’t normally be able to do. And make it your goal to do the same behaviors again and get to the next payday with $200 left over. Build up a cushion, and then start to pay your bills out of that cushion, not out of the current pay cycle. Eventually, you’ll only be using money you made a month ago or more, and you’ll forget when payday is. How boring! The point is, once you become more in control of your money, you won’t need to “unlock” your paycheck. You’ll be able to forget about it altogether.
What about you? Have you ever used a payday loan? What was your experience like? What advice do you have for someone struggling to break the payday loan cycle?