I’ve been too loose with my money. This week I bought a new bike, made accommodations for a trip to Disneyland and spent more money on dinners out than I do on an entire month of groceries. What’s turning my typical frugality into splurging? I’m getting my student loan refund on Thursday! While in the back of my mind I know that I will have to repay the $2000, another part of me is saying, "Woo hoo! I’m rich and I can finally experience the good life."
Luckily, student loans often sport a deferred interest at a low rate. However, this is not the case if you turn to banks or payday lenders for the same "fix."
I am not immune to the thrill of instant cash, and I’m betting many aren’t either. So, why is the idea of getting money now so exciting to us, and how do many lenders use it to their advantage? Let’s explore.
"Time discounting" is what psychologists call the phenomenon that takes place in our brain regarding money that will arrive in the future, whether in April or next week, that makes the money seem less valuable. In layman’s terms this means that people put more stock in immediate rewards than in ones that will come down the road, even if they have a guarantee that they will show up. For example, if I knew my student loans didn’t kick in until April, I would be a lot more careful about sticking to my budget.
Even simpler, though, it means you’re likely to grab a $200 payday loan now instead of waiting a month to get a $250 paycheck. Your brain chooses to ignore that astronomical interest rate until it rears its ugly head on the top of the bill you have to pay. The favor goes to that which is immediate.
Why are some people less susceptible to offers of instant cash than others?
The answer may be in their prefrontal cortex: the part of the brain that processes executive thinking, including dwelling on the future consequences of decisions we make today. When we are under stress — such as when we have bill collectors breathing down our necks, or when it’s the first week of classes for the term — this part of our brains tends to go offline. The amygdala, or emotional center, takes over. We then act with feeling instead of logic.
During stressful times, the need to have something now to take some of that stress away feels stronger than the need to be fiscally responsible over time.
Molly Crocket wrote in the Guardian, “The pressing demands of an overdue utility bill or an essential home repair may cause cash-strapped borrowers to fixate myopically on getting access to fast and easy cash.”
What to do to prevent falling prey to these practices? Tackle your stress head-on. Turn to exercise, meditation, journaling or another pastime that can help you worry less about the trying parts of your life. While all of us are prone to overspending when we shouldn’t, it’s important to look at the consequences down the road. It’s rare that a person takes out a loan to satisfy some instant gratification and doesn’t look back on that decision with regret.