If someone offered to give you $500 now if you paid them back with $5,000 in a year, would you take it? What if the amount you had to pay back was only $2500? Do you think that's a good deal? This may sound like a crazy amount to pay back on a small loan, but this is what thousands of people do every day when they get a payday loan.
Payday loans are short-term loans that usually last about two weeks. They are also called cash advances or quick cash loans. The borrower pays a fee that can be anywhere from $10 to $40 per $100 borrowed for a two-week loan. This is in exchange for being able to borrow small amounts of money, from $100 to $500. The borrower writes a check for the amount they want to borrow plus the fee. The check is dated for two weeks from now, so the lender can cash it then.
Even though these fees may seem small, if you look at them as an annual percentage rate, they add up to anywhere from 250 to 1000 percent per year. That is a huge amount of interest in a world where 25 percent on a credit card loan is considered high. Still, the payday loan business is doing well, and there are now about 23,000 stores in the United States that offer some kind of cash advance loan.
Why do people get loans like this? The main reasons are that it's easy and there aren't any better options. Now, these stores are so common that you can often find more than one on the same block. They don't check your credit, and almost anyone with a steady job can borrow money from them. People usually take out payday loans because they don't have other ways to borrow money, like credit cards, friends with money, or a local credit union that gives short-term loans.
People who support these financial products say that they are just giving the public what they want. It's possible that's true, since these businesses are doing so well. The question that still needs to be answered is whether or not people really want to borrow money at 500% per year. Most likely, they are doing this because they can't find anything else that costs less. If you need a short-term loan, you can go to a payday loan store and get one. But anyone who wants to borrow money should know that this is one of the most expensive ways to do so in the world.
