Recently, I came across an article that talked about the damaging personal finance habits of millennials called “Why Are Millennials Turning To Payday Loans And Pawn Shops?” written by Kristen Doerer. The article, featured on PBS Newshour, refers to the alarming uptick of millennials using things like payday loans and other potentially dangerous financial strategies to provide immediate relief when they are strapped for cash.
Payday loans, in layman’s terms, are loans for a relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck. These types of loans are (mostly) used by individuals living paycheck-to-paycheck who don’t have access to cash. The borrowers need money ASAP, and are willing to sacrifice down the road (i.e. paying back money accrued through insanely high-interest rates) for money now. An article on Credit.com explains a little about the people who use them saying, “It is most common for borrowers who don’t have access to credit cards or savings accounts to use this type of lender. Since these loans don’t require a credit check, people with no credit or credit problems often turn to payday loans.”
There is a growing concern about millennials misusing payday loans as quick short-term solutions, because when they are used irresponsibly, they can quickly snowball into a problematic long-term debt problem. Kristen Doerer, the author of the PBS article, points to the extraordinarily high-interest rates that come with these loans as being one of the root causes of the problem. It’s especially problematic in states that have no cap on the amount of interest they can charge on Payday loans, which can cause one’s financial health to plummet rapidly. For example, the Doerer talks about the
insane average interest rate in the industry saying,
“There, the annual interest rates on payday loans are in the triple digits, and the industry charges an average of 574 percent. (To put that in perspective, the average annual interest rate for credit cards is around 15 percent.) If you took out a $100 payday loan in South Dakota, but made no payments, you’d end up owing $674 in a year. Unable to pay off such a loan, most debtors take out another loan to pay for the first, and so on. That’s when a short-term fix can throw you into a long-term debt spiral, resulting in even greater charges than the original loan amount.”
It’s clear that those percentages can hurt individuals who are already struggling with their finances. What’s even more shocking is that according to the research the article presents, 42% of millennials have used an alternative financial service. The greatest issue is that this type of financial behavior is indicative of the fact that millennials struggle with personal finance. This is in tandem with the fact that they have to deal with sizable student loans and a sluggish job industry. While a lot of millennials have used alternative financial services, the article says that “payday loans and pawnshops led the list with 34 percent of respondents reporting having used them.” Doerer writes that this issue is one that traditionally “riddled the storefronts of poorer communities,” but now the problem has permeated the “middle-class, college-educated millennials as well.”
The author then goes on to the discuss the way in which we can combat the underlying cause of such erratic and damaging behavior — an increased focus on financial education at a young age. Only 17 out of 50 states currently require students to take classes in personal finance. Doerer explains why this lack of education might be the reason so many millennials are resorting to desperate measures for cash. She writes,
“One explanation is a lack of financial literacy. According to the study, a mere 24 percent of millennials demonstrate basic financial knowledge: the ability to do calculations related to interest rates and show an understanding of risk diversification, interest payments on a mortgage and the relationship between interest rates and bond prices.”
Educating teens and young adults is essential if we, as a society, are going to stop the growing trend of individuals making poor financial decisions. Obviously, some alternative financial services will be necessary for the few people who truly need them, but they, at the very least, should be able to enter into them with a clear understanding of how their finances will be impacted. Until individuals are able to calculate interest rates and grasp how they can avoid falling into a debt spiral, one should use these services with extreme caution.
The article ends with a quote by Helaine Olen, co-author of “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated.” To answer the question “what should a financially struggling millennial do?” she offers up these three pieces of advice: “1) Pay down your debt — at the very least, your high-interest debt. 2) Save up an emergency fund that covers at least three months of necessary expenses, including food and housing. 3) Start saving for retirement.”
Below are some helpful links to help you understand the dangers of payday loans, and why they can be damaging to one’s personal financial health.
- Confessions of a Former Payday Loan Junkie
- Op-Ed: Improving Financial Literacy Is Essential to Our Nation’s Economic Health
- Why Payday Loans And Cash Advances Are So Bad
- Confessions Of A Former Payday Loan Center Manager
- A Game You’ll Never Win: The Payday Loan Trap
- The Ugly Truth About Payday, Pawn Shop, and Car Title Loans
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