The Month After

Posted by on Jun 15, 2006 in Pitfalls

The Month After

One common pitfall of payday loans is The Month After.

When you repay the loan on your next paycheck, will you have enough money to survive?

Let’s do the math…

Lets assume:

  • your take home pay is $1200 per month
  • you take out a $400 payday loan (to cover an emergency)
  • the payday lender’s fee is $25 per $100
  • total interest is $100 (4 x $25)
  • the lender will deduct $500 from your next paycheck ($400 principle + $100 interest)

If you repay your loan with interest on time, the lender will deduct $500 from your take home pay:

$1200 (your take home pay) – $500 (amount you owe lender) = $700

You will have to survive on $700 for an entire month. That’s about half your take home pay. Will you be able to pay rent, bills, transportation and other expenses?

If you had trouble surviving on $1200 last month, how will you survive on $700 this month? Chances are, you won’t…

Ethical payday lenders will limit loans to no more than 1/3 of your take home pay. If you borrowed $600 from an unethical lender under the same interest rate ($25 per $100):

$1200 (your take home pay) – $750 (amount you owe lender) = $450

If you are living paycheck to paycheck on $1200 per month, there is no way that you will be able to survive the next month on $450. You would have to ‘roll over’ the loan (pay only the interest but not the principle). This would effectively double the fee you end up paying on this loan and, if you are not careful, it could put you on the debt treadmill.

Before applying for a payday loan, be sure to:

  • have a concrete plan to repay loan in full on your next paycheck
  • have a survival plan for the month after
  • consider Payday Loan Alternatives

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