A professional athlete typically earns huge annual salaries, on top of their million-dollar endorsement and profitable career opportunities. But it does not secure them from having financial distress. During the National football league last May 2011, Pro Player Funding (PPF) a well-known lender offers a special high-dollar loan for the players to support their financial needs. The then quarterback of Tennessee Titans, Vince Young took PPF’s offer. He get $1.8 million dollars payday loan with lock-out period.
Just like any other payday loan, PPF charged Young an enormous 20% - 34% interest rate with 2 years contract. Young qualified for the loan based merely on his salary, PPF did not consider his credit history, financial obligations and even the stability of his income. A massive $1.9 million dollars was then charged to Young by PPF during his transfer to other team because he was not able to pay one payment for his loan. The said amount is equivalent to the player’s yearly salary.
Young and many other professional athletes who availed PPF’s offer during the NFL lockout landed on the same scenario. One of these athletes is Bryan Mckinnie. At that time he was Baltimore Ravens Lineman and settled with PPF for $3.2million. Failure to adhere company’s repayment terms causes them to lose and pay for the full loan amount as stated on the contract they signed during the event.
Young and Mckinnie don’t have financial skill in making good management decision. At first, they enjoy the quick and easy cash in hand offered by the PPF, but with the intricacy of loan agreement plus huge interest rate, both players are suffering from losing millions in the end. In the same year, 33% of the respondent on a survey about financial literacy uses high-interest product like payday to cover up unexpected expenses.
The survey was conducted by (FINRA) Financial Industry Regulatory Authority. On yearly average, 400% of the borrowers are put in a difficult situation when they missed a single payment or when they lost their income. Borrowers with no financial security like the NFL salary of Young and Mckinnie, are most likely to be tempted by the initial benefits of the loan and later face expensive battle with the payday lenders. Prior to making a decision on having payday loans, you should be fully informed on its real cost, parameters of its repayment, implications of non-payment and should consider other alternatives for borrowing.
1. Installment loans
Installment loans are short-term loans with smaller installment payment methods that are more feasible for borrowers in the long run. It is one of the growing forms of lending in the non-bank consumer market. The continuous increase of consumer who uses installment loans in California leads to the downfall of payday in the country. Base on the analysis of 296 installment loan contract by Pew Charitable Trust, they concluded that installment loans are safer and more economical than payday loans. It only takes 5% or less of the borrower’s monthly salary and has smaller organizational fees than payday loans. But, it doesn’t imply that installment loans are risk-free. Pew also discovered that these loans increase the total cost of installment by 30% by putting irrelevant add-ons such as credit insurance.
2. Fintech Alternatives
Finetech Company uses an alternative approach to borrowers with thin credit files such as cell phone payment history. One example is Kiva, it is a crowd funding platform which is non-profit that lend money to people without a credit history.
A payday advance app called Erin, facilitates advance withdrawal of its user’s upcoming salary as much as $100 per day. The company claims as an interest-free with no single charge taken to its users, instead it requires its user to place the tip in return for their access. This kind of early wage app appeared to be a better alternative to a payday loan but it is currently under investigation. Consumers must be cautious in using the early wage app. This new fintech company does not guarantee a better offer than payday loans. Thus, it has its own disadvantages and risk.
You may consider consulting a financial advisor if you are not sure what payday loan alternatives you can take.
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