Payday and cash advance companies allow you to borrow money from your next paycheck. Requirements are that you have identification, proof of income, and a banking account. The consumer simply writes a check for the next pay period, receives cash, and can begin using the money. Sound too good to be true? There are many things to consider with payday loans. The typical fee for using a payday loan is $15 - $30 for every $100 borrowed. The APR (Annual Percentage Rate: interest rate plus any fees included in the loan) is typically very high and can get even higher if you are late paying off the loan. Payday loans are usually for a two week period; the APR can be around 400% and will get larger if late fees are added. It is very common for consumers who use a payday loan to run into trouble having the money available to pay back the loan. When this happens, the consumer is left with two choices.
- Let the lender deposit the original check. If there are insufficient funds in your account you run the risk of bouncing a check.
- Extend the loan by making a minimum token payment (this can range from $20 – $50) and write another postdated check. This will make your balance larger. It may be impossible for you to payback this doubled amount with your next paycheck.
Each loan policy will vary from company to company and even state to state. Some companies will only allow you to get a certain number of loans from them in one year. Some consumers get into the trap of having loans with multiple payday and cash advance companies. This is strongly discouraged. It can lead to serious debt that is very difficult to escape.
It is important keep your finances in order so you can avoid using payday and cash advance loans. Before using this type of service, make sure that you have exhausted all other resources. Re evaluate the need for the loan; can the purchase wait until you have the actual cash? Will you honestly be able to pay the loan back in your next paycheck? What are you going to do to ensure that this occurs? Will you have the money to pay any roll over fees if they are needed? Do you have another resource from which to borrow? For example, friends, family, your bank, even an advance from your place of employment.
If the reason for getting a payday loan is to pay off another creditor consider discussing the matter with that creditor. In some cases, it may prove beneficial to take another late charge with a current creditor than to borrow the money from a payday or cash advance company and risk being in trouble with yet another creditor.
Payday loans are quick, easy, and often seen as a harmless and friendly loan. Low income and minority groups become an easy target. Higher income groups have also been found to be customers. Consumers do not expect that they will not be able to pay off the loan. Before they know it they owe much more than the initial loan and they are caught in a vicious cycle.
Stop the cycle before it starts…
educate yourself, put what you learn into practice,
and don’t let your debts and wants in life get out of hand!