What is a Payday Loan?

Around this time of year you may be hearing a number of ads for payday loans. Maybe you spent a little too much on Christmas gifts, and you need some cash to make it to your next payday. These small, unsecured loans are designed to “get you over the hump” when you need it. However, there are a number of risks associated with payday loans, and most recommend avoiding them if at all possible.

The Process

Payday loans are also known as payday advances, check advance loans, and cash advance loans. They are typically small loans of less than $500, and the borrower will typically receive cash on the spot. The loan will then be due on your next payday.

Payday lenders will often review your credit and verify that you are employed. Typically, you will need to bring a pay stub to show that you do have an income. If you are approved, you will have to do one of a couple of different things. The payday loan company wants to make sure that it gets its money back. So, you will need to provide them with your checking account information, or you will have to write them a check for the amount of the loan plus any associated fees. You’ll date the check for the day the repayment is due. If you don’t come back to pay off the loan in person or talk to them, the payday loan company will take your money.

The Pros

To be fair, I’ll list the pros of a payday loan. If you desperately need money, this is one way to get it. You will get the money quickly, and typically, you don’t need a stellar credit rating.

The Cons

Now to list why you should avoid payday loans! The interest on payday loans is very, very high because they charge large fees for relatively small amounts. You can end up with the equivalent of an annual interest rate of 400% or more. Charging things to credit card is a better option. At least they’ll only charge you around 12 to 30% in interest. If you cannot make the payment on time, many of these companies offer rollover options, which can lead to a vicious cycle of indebtedness. When the loan rolls over, you will be charged a new set of fees. This can make it harder and harder for you to pay off the loan.

To make this clearer, let’s look at an example. Say you borrow $100, and the payday loan company charges you $10 to borrow the $100 (the fees are often even higher than this!). When the loan is due, usually on your next payday, you will have to pay them $110. Well, that works well enough, right? But what if you don’t have $110? What then? In many cases, the payday loan company will offer you a rollover. So, for another $10, you can wait until your next payday to pay off the loan. If you roll it over two more times, then you’ll end up paying $40 to borrow $100.

Paydays loans are not a good idea even if they sound tempting.

Other Options

If you are finding yourself in a financial bind, there are several things that you can do. First, start off by taking a good, realistic look at your budget. Can you reduce your spending? Second, talk to your lenders. They might be willing to work with you to reduce your monthly payments. Third, talk to a local credit counseling service and get help when you need it.

Have you ever taken out a payday loan? What was your experience?

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0 comments

  • There’s no real pros in taking out a payday loan, I can remember taking one out and kept on rolling it for some silly reason, suffice to say I paid pack twice what I took out in a period of a few months. I would definitely steer clear of these vices.

  • Caitlin Hopper /

    Yeah, it seems like an easy trap to fall into, especially if you don’t know how these loans work up front. You’re desperate, and they’re basically waving money in your face. I can see why many people take out these loans without asking too many questions.

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