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What You Need to Know About PayDay Loans

No matter who you are, if you live in the US you have been exposed to payday loan companies. Either you have used one to get a loan, you know someone who has used one, you have seen one of their offices in your neighborhood, or you have heard about them online, on TV, or on the radio. It isn’t just poor neighborhoods anymore. You can find them in the most exclusive Zip Codes in the country. If you don’t want to walk into one, you don’t have to. Online payday loans make it easy to use one in private if you don’t want your boss (or worse, your employee) walk into one.

Most personal financial advisers would suggest that you don’t use these services, and if you are using them now stop doing so. Why would financial experts recommend this, especially if you don’t have access to traditional loan sources like a credit card, bank, or credit union? If you know more about them, maybe their advice would make more sense.

What Is a PayDay Loan?
A classic payday loan nothing more than a short-term term loan where the company issuing the loan requires that you have a job with a steady paycheck before you get the loan. A payday loan may have other names, like a cash advance loan, check advance loan, post-dated check loan, or a deferred deposit loans.

The names may be different, but they all work in a similar way. The borrower writes a personal check payable to the lender for the loan amount plus any fees. The payday loan company the gives the borrower the loan amount (some may deposit the amount electronically into the borrower’s bank account), and agrees to hold the check until the loan is due, usually the next time the borrower gets paid. The loan (plus the fee) gets paid off after the next payday.

Payday Loans Are Very Expensive
If the loan is extended, or “rolled over,” you may be charged new fees or penalties, making it harder for the borrower to pay it off. How expensive can it get? For example, say you need to borrow $100 for two weeks. You write a personal check for $110, with the $10 being the fee for the loan. The payday lender agrees to hold your check until your next payday. When that day comes around, you either pay it off or rollover the loan until next payday. You may have to pay even more than $10 for this rollover fee. If you roll-over the loan several times, the finance charge might be half or more of your original loan amount.

Payday loans are much more popular with people who can’t get short term credit from their bank or credit union. Not surprisingly, payday loan businesses are much more common than banks or credit unions in poor neighborhoods.

Options to Payday Loan Companies

    Before you take out a payday loan, you should consider one or more of the following options:

  • Banks and Credit Unions: Ask if they have credit options that fit your needs. Even if they said no before, they may say yes now.
  • Community Organizations: A local community-based organization may make small loans to individuals or small businesses.
  • Cash Advances: A cash advance on a credit card or check card (typically an ATM card that can be used like a credit card) also may be possible, but it may have a higher interest rate than a regular bank or credit union loan.
  • Negotiate with Your Creditors: If you see a short term financial problem coming up, contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
  • Get Help: Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
  • Plan Your Spending: You can avoid going to a payday loan company if you take the time to understand your own finances. That means understanding how much comes in, how much goes out, and making spending decisions so you will have money left over at the end of the month.
  • Save More: You savings can help you avoid borrowing from a payday loan company in emergencies.

If you have not choice and have to use a payday loan company, borrow only what you can afford to pay with your next paycheck — and make it a goal to survive to the next payday without borrowing any more money.

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One Response to “What You Need to Know About PayDay Loans”

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