Are Payday Loans Worth It?

I can imagine several scenarios, which can push a person to hand over his payroll ATM as a guarantee and in exchange for a loan. An emergency such as the hospitalization of a loved one, for one. According to Carlo Gonzales, MBA, another reason is the delay of one’s salary. (I hope that employers who fail to pay their employees on time can be counted on my fingers.) To fund an addiction – gambling, drugs or what have you, for another. Unfortunately for payday loans, operated by institutions as varied as the reasons why people take this type of loans, are not only accessible (quick and no questions asked) but also very expensive.

You can see advertisements for payday loans everywhere. You can see them inside jeepneys, at the back of tricycles and pedicabs, and even on electric posts in your usual urban neighborhood. These ads promise same day processing and release of the loan proceeds. This tells us how fast, easy, and convenient it is to get a payday loan. These ads; however, don’t tell us that paying off the payday loan can take months and costing thousands of pesos on top of the net amount you received.

Payday loans come in different forms, but let’s focus on the more controversial one — the one which requires someone to hand over their payroll ATMs until the loan is paid. Let’s call this ATM loan.

How Does This Payday Loan Work?

Say, you want to borrow Php 20,000. A friend who operated this kind of business before said that they charged 10% interest per month. This rate was very cheap compared to other payday loan companies.

Assuming that the loan is good for two months, which is the usual short-term payday loan companies, give their clients, and then the interest cost for your loan is Php 4,000! This amount is deducted from your loan right away. On top of the interest, the lending company charges you processing fee ranging from Php 500 to Php 1,500. Let’s assume that for our example, the processing fee is Php 1,000. This fee is also deducted outright.

[For those who are not familiar with ATM loans, the borrower hands over his payroll ATM to the lender. On payday, the lender withdraws the borrower’s salary, deducts the loan payment, and then deposits the remaining amount to another bank account provided by the borrower. At the end of the loan term, the lender returns the payroll ATM to the borrower. Of course, there is the standard credit investigation and requirements. Some payday loan lenders only lend money to employees working for companies listed in the Philippine Stock Exchange. This means that for people working in unlisted companies, the cost of borrowing can be much higher that the costs outlined below.]

For a loan of Php 20,000, you’ll only receive Php 15,000! For a two-month term, the annualized cost of this ATM loan is 214%. This translates to paying about Php 2.14 for every peso you borrow in any given year. This prohibitive cost is the reason why payday loan companies are everywhere – this is one of the easiest legal ways for companies to earn money.

Is There Good In ATM Loan?

Actually, yes. Not all payday loans, specially the type we just discussed, are all bad.

Even the most prepared person sometimes can be caught off guard by life. There will come a time where we will need immediate access to cash to tie us over an emergency. For people who don’t have credit cards, ATM loans can be the only lifeline.

For anyone contemplating of availing this type of loan, due to the prohibitive cost of doing so, I suggest that you exhaust all other means to get that emergency cash. An ATM loan should be your Plan Z, not Plan B or even Plan C. I’d rather you lose face asking all your friends, relatives, and neighbors for a loan rather than willingly and knowingly putting yourself in the middle of a financial black hole. I wish that each of us would be like the ant in the classic children’s Filipino story, Si Langgam at si Tipaklong. Like the ant in the story, I hope that every chance we get, we prepare for the inevitable rainy season.