U.S. Markets closed

Will the Government Shutdown Lead to a Spike in Payday Loans?

Christine DiGangi

With lawmakers unable to agree on an extension of federal spending authority, the U.S. government went into a partial shutdown this morning, leaving hundreds of thousands of federal employees without a paycheck.

Essential federal employees will continue working, but others have been furloughed. While an estimated 800,000 government workers had their jobs and incomes put on hold today, their financial obligations were not, and they’ll have to figure out ways to pay their bills.

There are a few options for people in this situation: withdrawing money from an emergency fund, taking out a personal loan, using a credit card cash advance, putting purchases on a low-interest credit card or taking out a payday loan.

Using an emergency fund is the best option. This is the sort of situation it’s designed for, but not everyone has one. Similarly, not everyone can qualify for a personal loan, and some people don’t have credit cards.

While payday loans carry risks and can be very expensive, they’re available to most people. In a situation where the choice is between defaulting on financial obligations and taking out one of these high-interest loans, a consumer will understandably go for the payday loan. In fact, with the government shutdown looming, USAA told its members it would offer zero-interest payroll advances to help them meet expenses.

What Is a Payday Loan?

According to a report from the Pew Charitable Trusts, 12 million Americans take out payday loans each year. The high-interest, two-week loans are usually less than $500 and are intended to cover a borrower’s costs until his or her next payday.

However, the same report states that the average borrower ends up indebted for five months for a $375 loan and paying $520 in finance charges.

This is how that all works out: A borrower needs an infusion of cash and is attracted to the quick payout and short term of the payday loan. At the end of the term, they see the choice between paying the debt in full, which they may not be able to afford, or paying fees to extend the repayment period, which results in a cycle of debt they likely wanted to avoid in the first place. Only 14% of borrowers can afford to pay the full amount.

The Consumer Financial Protection Bureau released a study on this aspect of payday loans earlier this year, saying the financial tool frequently transitions to a long-term debt burden.

How to Get Out of Payday Loan Debt

At the same time, a majority of payday borrowers said the loan provided the relief they needed, even if they found themselves in debt longer than they wanted to be. For those who get caught in the payday loan debt cycle, there are a few options.

Depending on the lender, an Extended Payment Plan may be available, which extends the repayment period without extra fees. While 75% of payday borrowers rely on the lender for loan information, independent research will help a consumer make the best decision, if he or she determines a payday loan to be the best financial option at that time.

It may also be possible to negotiate a debt settlement, but perhaps the most viable option is to scrimp as much as possible in the budget in order to pay the loan back. It’ll be cheaper in the long run.


More from Credit.com

  • IBM reports surprise revenue rise on cloud growth
    Business
    Reuters

    IBM reports surprise revenue rise on cloud growth

    Revenue from the cloud business, which is crucial as IBM pivots away from its established businesses including mainframe servers, rose 21% to $6.8 billion (5.2 billion pounds) in the fourth quarter ended Dec. 31. Over the past few years, Chief Executive Officer Ginni Rometty has been trying to shift the company's focus to the cloud through acquisitions and also by selling some of IBM's legacy businesses. IBM bought Linux maker Red Hat Inc in a $34 billion deal last year, its biggest acquisition so far, in a push to expand its subscription-based software business and counter falling software sales and declining demand for mainframe servers.

  • Netflix 4Q subscriber growth tops expectations
    Business
    Yahoo Finance

    Netflix 4Q subscriber growth tops expectations

    Netflix (NFLX) added more new paying subscribers in the fourth quarter of 2019 than expected, the company said in its first report since the launch of new streaming services including Disney+ and Apple TV+. However, its forecast for subscriber growth in the current quarter fell short of Wall Street's estimates. Here were the main results from the report, compared to consensus expectations from Bloomberg: Revenue: $5.47 billion vs. $5.45 billion expected Earnings per share: $1.30, vs. $0.30 Y/Y Global streaming net paid subscriber additions: +8.76 million vs. +7.65 million expected Netflix said it expected to add 7 million paying members in the current quarter, short of the 7.82 million expec...

  • Business
    MoneyWise

    Should We Worry About Negative Interest Rates?

    Commercial banks in Switzerland and Denmark recently announced negative interest rates for wealthy depositors, and the European Central Bank — which has had negative rates for five years — is expected to send its rates even lower. European Central Bank officials say the below-zero interest is providing important support for Europe's economy, contrary to complaints from banks in Germany and France that the negative rates are causing harm. Negative interest rates have become a topic in the U.S. because of the recent flip-flop for Treasury bonds.

  • Business
    Barrons.com

    The Stock Market Is Sliding After Coronavirus Is Found in the U.S.

    2:40 p.m. The stock market slid to its low of the day after multiple reports said that the first case of coronavirus has been found in the U.S. The virus has killed at least six people in China. The Dow Jones Industrial Average has dropped 179 points, or 0.6%, to 29,170, while the S&P 500 has fallen 0.3% to 3320.92, and the Nasdaq Composite declined 0.3%.

  • Business
    Barrons.com

    Boeing’s 737 MAX Jet Won’t Be Flying Anytime Soon. Its Stock Is Tumbling.

    Trading in stock in commercial aerospace giant (BA) was halted pending news. Shortly after the stoppage, the company updated investors about its 737 MAX jet. “We are informing our customers and suppliers that we are currently estimating that the ungrounding of the 737 MAX will begin during mid-2020,” reads the company's news release.

  • Guggenheim Says Market a ‘Ponzi Scheme’ That Must Collapse
    Business
    Bloomberg

    Guggenheim Says Market a ‘Ponzi Scheme’ That Must Collapse

    Scott Minerd has a message for his fellows at Davos who are applauding rallying markets: Things aren't as good as they seem. The Guggenheim Partners investment chief likened the inflation of asset prices caused by the loose money policies of central banks to a “ponzi scheme” that eventually must collapse. “We will reach a tipping point when investors will awake to the rising tide of defaults and downgrades,” he wrote in a letter from the World Economic Forum meeting.

  • Business
    Benzinga

    8 Stocks To Buy With Dividend Yields Of At Least 9%

    Fortunately, there are plenty of stocks out there with generous dividend or distributions yields that analysts see as good investments as well. Here are eight stocks to buy with at least 9% yields, according to Bank of America. TCG is a business development company, a type of closed-end investment company that invests in small and mid-sized businesses.

  • How 5 of America's Richest Families Lost It All
    Business
    MoneyWise

    How 5 of America's Richest Families Lost It All

    Some of America's oldest family fortunes were built in the 1800s, during the nation's rocky but formative youth. The Rockefellers grew wealthy after John D. Rockefeller struck oil, and Levi Strauss got rich after inventing blue jeans as work pants for the Gold Rush days. Such losses -- which can happen in just one generation or stretch out over a century or longer -- are often driven by bad decisions, such as overspending and debt; investments that didn't pan out; and family infighting over the money.

  • How To Invest $100,000 (and Turn It Into $1 Million)
    Business
    SmartAsset

    How To Invest $100,000 (and Turn It Into $1 Million)

    As you invest for retirement, becoming a millionaire might be a reasonable goal. Yes, millionaire status is no longer rarefied air, and depending on your income needs, having at least $1 million in the bank might be necessary to last you through retirement. If you're interested in reaching millionaire status as an investor, here's what you need to know to pull it off.

  • `Substantial' Market Correction Is Unlikely, Fidelity's Richards Says
    Business
    Bloomberg

    `Substantial' Market Correction Is Unlikely, Fidelity's Richards Says

    Anne Richards, chief executive officer of Fidelity International, discusses the outlook for the global economy, financial markets and active management in 2020. She speaks with Francine Lacqua on "Bloomberg Markets" at the World Economic Forum's annual meeting in Davos, Switzerland.

  • Founder of world’s largest hedge fund says ‘cash is trash’ as the Dow soars to records
    Politics
    MarketWatch

    Founder of world’s largest hedge fund says ‘cash is trash’ as the Dow soars to records

    If there are investors who believe cash is king amid this market bull run, they ought to think again, suggests Ray Dalio. The billionaire founder of the hedge fund Bridgewater Associates said during a CNBC interview on Tuesday on the sidelines of the World Economic Forum in Davos, Switzerland, that investors should be buying this market, rather than seeking safety in cash. “Cash is trash,” said the hedge-fund luminary, who founded Westport, Conn.–based Bridgewater in 1975.

  • Stock Market Sells Off As China Virus Scare Hits U.S.; These 4 Big Name Stocks Shoot Higher
    Business
    Investor's Business Daily

    Stock Market Sells Off As China Virus Scare Hits U.S.; These 4 Big Name Stocks Shoot Higher

    Chinese online retailing giant and IBD 50 name Alibaba fell 2.5%, but remains extended from a cup-with-handle base above an 88.38 buy point. The Dow took a second big hit after CNBC reported that sources at Boeing revealed the jet-making giant doesn't expect regulators to clear its troubled 737 Max until June or July. Boeing fell 5.5% to its lowest level in a year and remains below its 200-day and 50-day moving average lines.

  • 9 Signs You Are Not Financially OK to Retire
    News
    Investopedia

    9 Signs You Are Not Financially OK to Retire

    What it really takes to retire is a solid grasp of your budget, a carefully considered investment and spending plan for your life savings, debt that's under control, and a plan you're excited about for how you'll spend your days. With that in mind, here are 10 signs you might not be ready to retire yet. Struggling to Pay Current Bills It goes without saying that if you're struggling to pay your bills with a paycheck from work, retiring won't make things easier.

  • How to Invest $10 Million for Income
    Business
    SmartAsset

    How to Invest $10 Million for Income

    A $10 million nest egg can last you decades, especially if you make smart investments that prioritize income generation. Wealthy investors should consider mutual funds that have high minimum investment requirements, in part because they tend to have lower fees. Plus, mutual funds help investors generate income from earned dividends on stocks and interest on bonds in the portfolio.

  • Legendary investor Paul Tudor Jones says market today is like early ’99, driven by ‘insane monetary policy’
    Business
    MarketWatch

    Legendary investor Paul Tudor Jones says market today is like early ’99, driven by ‘insane monetary policy’

    Billionaire investor Paul Tudor Jones is nothing short of flabbergasted by economic and monetary policy coming from Washington. We're just in the craziest monetary-fiscal [policy] mix in history. It's so explosive, it defies imagination.

  • How Are Dividends on IRAs Taxed?
    Business
    Investopedia

    How Are Dividends on IRAs Taxed?

    Dividend-earning stocks and mutual funds can help your retirement portfolio grow more quickly, as long as you reinvest the dividends. In a regular investment account, the dividends and capital gains you earn benefit from capital gains tax treatment. For example, if you are in the 10% or 15% tax bracket, you would pay 0% taxes on dividends and long-term capital gains.

  • 11 self-made millionaires reveal the best advice they ever got
    Business
    USA TODAY

    11 self-made millionaires reveal the best advice they ever got

    The best (and worst) advice I ever received came in the form of an insult from my long-term boyfriend and business partner. 4. “All events in your life are neutral until you label them.” During my recovery from a near-death cycling accident, I struggled with many “life isn't fair” moments.

  • UBS misses targets, dials back ambitions
    Business
    Reuters Videos

    UBS misses targets, dials back ambitions

    Famous for wealth management, UBS suffered in Q4 as wealthy clients took $4.7 billion of their money elsewhere. Tuesday's (January 21) update from the Swiss bank also shows that despite a near 130% rise in quarterly net profit it missed profit and cost targets for 2019, prompting it to dial back on some financial goals. Like others, UBS is hurting badly from the low-to-no interest rate environment.

  • Is It Time to Buy These 3 Beaten-Down Stocks? Analysts Say Yes
    Business
    TipRanks

    Is It Time to Buy These 3 Beaten-Down Stocks? Analysts Say Yes

    The term 'buy when there's blood in the streets' was coined in the 18th century by Baron Rothchild. While some investors automatically avoid underperforming names, the ones willing to take the risk can often receive handsome reward once the company at question executes a turnaround. With this in mind, We'll open up the TipRanks database and take a look at three beaten down stock which those in the know think are ripe for a trend reversal.

  • This is how far and fast the coronavirus has spread through U.S. stocks
    Business
    MarketWatch

    This is how far and fast the coronavirus has spread through U.S. stocks

    Fears of a potential coronavirus pandemic has weighed heavily on shares of companies in a wide variety of sectors this week, particularly those with revenue exposure to travel into and out of China. As airports in several countries increased biosecurity screenings of passengers from China, travel-related stocks were hit hard, especially considering how travel could be curtailed during the upcoming Lunar New Year travel season. “Market participants fear possible contagion, as hundreds of millions of Chinese are expected to travel this Lunar New Year, which begins Friday, and as the virus has been detected in three countries outside of China,” wrote Charles Campbell, trading desk specialist at MKM Partners, in a note to clients.

  • These 10 Rules Made Warren Buffett a Billionaire
    Business
    MoneyWise

    These 10 Rules Made Warren Buffett a Billionaire

    Warren Buffett may be worth tens of billions, but he still lives simply, and his strategies for smart investing and amassing wealth aren't too complicated either. Buffett's first key to prosperity has little to do with picking stocks. "Without good communication skills, you won't be able to convince people to follow you even though you see over the mountain and they don't," Buffett once told a Stanford MBA student.

  • Boeing Stock Dives As 737 Max Return Slips Further; Rival Airbus Jet Gains
    Business
    Investor's Business Daily

    Boeing Stock Dives As 737 Max Return Slips Further; Rival Airbus Jet Gains

    Boeing stock tumbled after the company confirmed it now sees getting regulator clearance for the 737 Max's return well into the summer. The aerospace giant sees regulators signing off on the Boeing 737 Max in June or July, sources told CNBC, months later than what it previously expected. "We are informing our customers and suppliers that we are currently estimating that the ungrounding of the 737 MAX will begin during mid-2020," Boeing said in a statement later.

  • Is Exact Sciences Corporation (NASDAQ:EXAS) Trading At A 40% Discount?
    Business
    Simply Wall St.

    Is Exact Sciences Corporation (NASDAQ:EXAS) Trading At A 40% Discount?

    How far off is Exact Sciences Corporation (NASDAQ:EXAS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. This is done using the Discounted Cash Flow (DCF) model.

  • Dow Leads Market Indexes Lower Amid Reports Of First U.S. Coronavirus Case
    Business
    Investor's Business Daily

    Dow Leads Market Indexes Lower Amid Reports Of First U.S. Coronavirus Case

    Key market indexes headed south in midday trade, led by the Dow Jones Industrial Average, after CNN reported the CDC is set to announce the first U.S. case of the China coronavirus. The Nasdaq, down nearly 0.2%, reversed back into the red, the S&P 500 was also down 0.2% and the Dow Jones industrials fell more than 2% in the stock market today. Small caps tracked by the Russell 2000 were sharply lower, down 0.8%.

  • Why This Top-Notch Biotech Stock Just Plunged By Double Digits
    Business
    Investor's Business Daily

    Why This Top-Notch Biotech Stock Just Plunged By Double Digits

    Further, Big Pharma rivals are likely to launch cardiovascular and lipid drugs with massive sales forces before Arrowhead reaches the market, he said. "We see the next 12 months as far more challenging than the past two years as Arrowhead faces sky-high expectations in the face of increasingly clear competitive headwinds," he said in a note to clients. Foroohar initiated coverage with an ARWR stock price target of 32.