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Payday nightmare

An overreliance on quick cash borrowings is sinking Summer’s finances. “Honestly I've probably taken out like every payday loan possible,” she admits.

Her latest payday loan, for $80, was to cover expenses that emerged shortly after her relocation. “After moving, man, I got really broke,” she said.

Summer isn’t alone. At least 12 million Americans take out payday loans every year, according to data published by the Consumer Financial Protection Bureau (CFPB) in 2022. Payday lending is allowed in only 26 states, and 16 of them require lenders to offer no-cost extended payment plans.

These loans usually have aggressive payment schedules and extremely high interest rates. Summer’s $80 loan, for instance, has an annual rate of 260.37%.

“What are you doing?” Hammer asks. “You know you paid $20 to borrow $80, right? So you’re giving them a hundred bucks.”

“That’s kinda stupid, yeah,” Summer concedes. Unfortunately, high-interest debt is only part of the problem. Her financial situation is worsened by bad spending habits.

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What budget?

Summer earns $3,518 in base salary and between $200 to $1,000 in bonuses every month. Some costs, such as rent, are split with her boyfriend, who is also earning a steady income of roughly $80,000 a year, according to her.

The couple earns well-above average, even in Texas where the median family income is $73,035, according to U.S. Census data. They shouldn’t need to rely on payday loans to survive. However, Summer tends to spend beyond her budget in most months, which is why she’s used quick fixes to plug the gap.

Some items on her monthly budget seem higher than average. Take, for example, the $1,200 she and her boyfriend spend a month on baby food. According to babycenter.com and the USDA, costs can be as little as $155 to $800 a month.

Meanwhile, in her recent bank statement, 42% of expenses were dedicated to shopping for “other large purchases” that were non-essential goods.

“You’re choosing basically five bulls--t purchases a day over you being able to retire,” Hammer says. Cutting back on any of these expenses, he believes, could free up more cash to avoid payday loans entirely. It could also give Summer an opportunity to start investing for her future.

Overspending isn’t unusual. A recent poll from The Associated Press-NORC Center for Public Affairs Research found that two-thirds of American households had raised their spending over the past year, even though only a fourth had seen their income rise over the same period. Despite rising inflation and higher interest rates, consumers are spending more.

Surveys suggest younger consumers, like Summer, are more likely to give into this temptation to consume despite financial challenges. Intuit’s Prosperity Index study found that 73% of Gen Z Americans were so worried about the current economy that they hesitate to set long-term goals (compared to 63% of the general population).

Meanwhile, 66% of Gen Z is unsure about ever having enough money to retire (compared to 58% of the general population).

Doom-spending could be the younger generation’s response to an economy that looks gloomy over the long term.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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