For anyone living paycheque-to-paycheque, it might be challenging to manage all of your financial obligations between pay dates, and every dollar you earn is designated for payment of some bill (some which may be overdue). For many, this is a stressful situation, and it can be even harder to dig out from under, especially if you take a payday loan to help with your monthly spending.

The terms “quick”, “same day approval” and “no hassle” can be enticing to those looking to fill personal financial gaps. For many, this is the beginning of a debt trap.

“At the end of the month when you get your salary, that loan payment is coming right out and then you end up with less money than you need to service your bills and meet your obligations at the end of the month, so what are you going to do? You end up take another one and another one,” said Renate McDonald, chief operating officer, Learn Grow Invest, during an interview with the Jamaica Observer.

McDonald explained that those attracted to these loans are “typically persons under pressure. It’s not even a class thing. The challenge is that these loans are so readily available it becomes a quick fix.” Persons engaged in taking these loans oftentimes do not take a step back to identify the root cause of the problem they are facing, which drove them to be taking payday loans in the first place.

McDonald hinted that the sector thrive on people wanting that quick-fix loan solution.

“They [payday loan institutions] can offer [these loans] and the companies themselves can benefit as well by charging a higher interest rate than the banks. They’ll continue doing it because people will continue coming and ultimately, they are providing these loans to persons who are not necessarily able to get it through traditional means.”

She stressed that the real threat to consumers is the high interest rates from these institutions.

“While repaying those [loans], any emergency that pops up hinders the ability to pay the loan, which in turn increases how much [a person] owes and affects your credit score,” she pointed out.

Some institutions charge interest rates as high 30 per cent and how much these institutions can charge is not restricted by The Microcredit Act, 2021; however, there is limit for how high interest rate can be charged. Creditors should not exceed the finance minister’s prescribed rate of 40 per cent per annum. Anything higher is considered harsh and unconscionable. While section 45 of The Microcredit Act says, “A microcredit institution may require a person who applies for a loan to provide evidence of that person’s ability to repay the loan”, the keyword there is “may”, meaning not mandatory and evidence of payment ability are usually restricted to the last three payslip and a job letter for proof of employment for payday loans. While larger institutions carry out credit checks, small loan facilities are not obligated to do the same as an additional step to determine if borrowers have any other loans or expenses that would otherwise decrease repayment ability. The laws only ensures consumers are treated fairly, the choice is on the consumer if they want to put their hat where it can’t reach.

Also to note, since the Bank of Jamaica (BOJ) required microcreditors to be licensed under The Microcredit Act, only seven have been listed on the BOJ’s website as official licensed operators, but firms who have submitted to be approved before 2019 are in the clear as licensing is pending. While consumers can’t be told where to take a loan from, the BOJ advises against securing loans from unlicensed financial institutions. And while McDonald isn’t advising against taking a payday loan, she says borrowers should, “carefully consider it [payday loans] before you enter into that kind of agreement and ensure that you know what the terms and conditions are”. Although emergencies do come up, McDonald says a payday loan should not be the first option nor should it become normalised.

It can be a sticky situation to get out of once the cycle has started and according to McDonald for those who have successfully managed to break the cycle they “either change their job to one where they are earning more money” or ” they choose to do a consolidation of their debt including that one [the most recent loan] and just be repaying to one institution, doing one loan repayment instead of multiple payments and that tends to lower the amount you have to pay each month.” She, however, wants to make it clear that the problem isn’t with these institutions targeting the vulnerable population, rather it is with the expectations and what we think we need versus what we actually need to live and survive. Knowing the difference, she said, is the only way to prevent being in a debt cycle from quick loans.

“You want to change your job? You want to move house? You want to experience a new country? You can’t do those things because you are tied to the debt that you have taken on and it really, for a lot of people, causes a lot of stress, pressure and sadness, and then you end up in this place where you feel like, what’s the point, you’re just living and working to pay bills, it takes the joy out of life.”

Once you’ve escaped the quicksand of payday loans, it’s a good idea to take steps to avoid resorting to them again.