Avoid Payday Loans

Payday loans, also called “cash advance loans,” “check advance loans,” “postdated check loans,” or “deferred-deposit check loans,” may seem like an easy solution to a temporary cash shortage, but for many people, payday loans are the beginning of a vicious and very expensive cycle that they find difficult if not impossible to get out of.Here’s an example: Robin was $200 short of having enough money to pay her bills, so she borrowed it from a payday lender who charged her $60 for up to 15 days. Her plan was to repay the money when she received her next paycheck in two weeks. When the time came, she still didn’t have enough money to pay off the amount she borrowed plus the $60 fee, so she paid an additional $60 fee and rolled her payday loan over for another two weeks.

The cycle continued, and at the end of six months she had paid $720 in fees and still owed the original $200. Her hopes of getting out from under this black cloud are slim. The interest rates on payday loans range from 300% to over 1,000%. Compare that to the interest rate on a small personal loan from a bank, which tends to be more than ten times lower than the rates on even the lowest rate payday loans. Even a relatively high-interest rate credit card has a much lower rate than a payday loan

Who Uses Payday Loans?

Payday lenders target:

• younger consumers with limited understanding of finances
• consumers who are deeply in debt
• consumers who are struggling to meet their day-to-day financial obligations
• those who have a history of using high-risk lenders

Examples of Payday Lenders’ Fees

200cash.com will advance you $200 for up to 15 days for a fee of $60. You can get up to four 15-day extensions for $60 each (for a total of $240 in fees). If the fees cause you to have insufficient funds in your bank account, you’ll be charged a $25 returned check fee by the company in addition to your bank’s returned check fee.

How Do Payday Loans Work?

Typically, you request a payday loan for a short period of time, usually one to four weeks. You show proof of employment and identification and write a postdated check for the full amount of the amount you borrowed plus the payday loan fee, which you leave with the lender. The fee may seem reasonable: $15 to borrow $100 for two weeks, for example. However, the annual interest rate on that loan is 360 percent. It may seem worth it if you’re in a bind, but people often extend the loan month after month and end up paying grossly inflated annual interest rates and end up in worse shape than when they borrowed the money in the first place.

Are Their Options to Payday Loans?

The US Federal Trade Commission’s recommendation is to avoid payday lenders. They recommend these alternatives for safer and less expensive loans:

• Contact a local credit union for a small loan.
• Ask for a pay advance from your employer.
• Consider a loan from family or friends and get the terms of the loan in writing.
• Use a credit card advance.
• Request additional time to pay the bill from your creditors instead of taking a payday loan.
• Find out what your options are before you need a short-term loan.
• Look into overdraft protection on your bank account so if you don’t have enough funds to cover a check you write, the bank will pay the check and you’ll avoid insufficient fund fees and returned check fees.
• See credit counseling.
• Plan ahead to prevent financial emergencies (see below).

Prevent Financial Emergencies

Take a close look at your income and expenses. Track where your money goes and find ways to save. It only takes small amounts in a number of different areas to add up to enough to build a small savings account that you can turn to in a bind instead of turning to high-rate lenders like pay day loan companies.

If you need help preparing a budget, see Budgeting 101 for easy-to-read articles about getting motivated, simple steps for setting up a budget, sample budget worksheets, ideas for finding ways to cut costs and save money, and more.

The Darker Side of Payday Loans

Payday loans are deceptive. Since you’re forced to turn over a postdated check, you may be harassed, threatened, or subjected to collection practices. The payday lender may deposit the check before the date you agreed on, causing your check to bounce and forcing you to pay more fees. Because people who use payday lenders are usually in desperate financial situations already, they may have trouble repaying the original loan and they continue to extend it until they’ve paid more in fees than the amount of their original loan.

The high rates of payday loans make it difficult for many borrowers to repay the loan because they are already in a desperate financial state. They keep extending the loan and end up paying more in fees than they originally borrowed, putting them in worse financial shape than when they started.