Chicago— This holiday season, many will be tempted to turn to payday loans, auto title loans, or high-cost installment loans to purchase gifts. In fact, payday lenders make their greatest profits this time of year. With some of these loans carrying triple-digit interest rates, consumers can find themselves trapped in a cycle of debt, paying for gifts long after the holiday spirit has faded.
Some lenders are only too willing to take advantage of peoples’ wishes for a happy holiday. What the lenders don’t mention is that borrowers often end up taking out several more loans before they manage to pay off what they owe.
“Despite legal reforms that have been implemented over the last decade, it is still dangerously easy here in Illinois to become trapped in a cycle debt,” said Dory Rand, President of Woodstock Institute. “This season, shoppers should resist the temptation to go into debt in order to purchase gifts.”
Purchasing an item with a payday loan effectively increases the cost of the item. Take this year’s hottest toy — a Hatchimal. The toy retails for about $70. If you use a payday loan to buy it, you’ll owe $154 (based on average number of rollovers at national average interest rate).
The Power Wheels 12-volt Wild Thing ride-on toy runs $330, but you’ll pay $727 for it using a payday advance.
Just compare these list price gift items with what they’ll cost a borrower who purchases them with money taken out as a payday loan. It’s a Christmas shopping list on steroids!
Woodstock Institute offered these suggestions for making holiday purchases:
• Seek out reputable consumer credit counseling services to assist with budgeting and help to work out debt repayment plans that will improve your financial welfare.
• Look for lower cost sources of credit at a credit union.
• Deal directly with creditors to negotiate a payment plan.
• Try to obtain an advance on wages earned from your employer.
• Start saving a little each paycheck so that you can weather unexpected expenses and drops in income. It is much cheaper to borrow from your savings than to pay high fees for two-week or three-month loans.
The Consumer Financial Protection Bureau unveiled a proposed rule in June that would protect consumers from the worst excesses of the payday debt trap. The rule would allow payday lenders to make loans only if the borrower can afford to pay it off without having to immediately turn around and take out a new loan—or go without basic necessities such as food and shelter. An estimated 1.4 million comments flooded into the CFPB about the proposed rule, including a comment from Woodstock Institute, Citizen Action/Illinois, and the Egan Campaign for Payday Loan Reform.
The CFPB proposed payday rule has not been finalized and faces strong industry opposition and potential opposition from the new Trump administration. Woodstock encourages people to contact their members of Congress to voice support for the common sense CFPB payday rule.