There are ads for payday loans almost everywhere you look these days. And just like with other financial products, you can usually figure out that the more a product is advertised, the more money it makes for the person selling it.
Payday loans go by many names, such as cash advance loans, check advance loans, quick cash loans, post-dated check loans, and deferred deposit check loans. But the product is always pretty much the same, no matter what they call it.
How do Payday Loans Work?
Payday loans are small loans for a short amount of time that have high interest rates. Most of the time, the person who wants to borrow money writes a check to the lender for the amount they want to borrow plus a "loan fee." The lending company then gives the borrower the amount of the check less the "loan fee" in cash. So, if you wanted to borrow $100 for two weeks, you might write a check for $115 and get the $100 in cash.
They are designed for people who only need a small amount of cash for a short time. In theory, they could help a family if, say, an unexpected bill came up this month that had to be paid right away. This meant that the family didn't have enough money to pay for things like rent and food. This is the idea behind the loans, and the fact that people can get cash quickly without having to go through a lot of credit checks makes the loan seem worthwhile at first glance.
Why They're Not Good
The details are the problem. Let's go back to the person who borrowed $100 and pretend that two weeks have passed. At the end of the loan's term, the borrower must either "redeem" the check by giving the lender the $115 in cash or "roll over" the loan for another two weeks. This adds another $15 to the payment, making the total due after two weeks $130. For people who don't know much about the lending business, this might not seem like a bad deal. Since he hasn't even checked your credit, the lender is taking a pretty big risk, right?
Nope, not really. The interest rates on payday loans are the most sneaky thing about them. The interest on a home loan may be around 8% per year, while the interest on a credit card, which most people say is close to usury, is usually around 30% to 40% per year. But when you compare that to a payday loan, whose interest rate is 400–700% per year, it's shocking.
A Payday loan is one of the most expensive ways to get credit that is legal. On top of that, if you don't pay back a regular loan on time, you can be hassled about it, but a Pay Day loan company can just deposit the check. When it bounces, you will have broken the law, which the Payday Company can use to force you to pay no matter what. In fact, they can threaten you with criminal charges almost right away, which regular creditors can't do.
So why do Payday loans exist. The cynic would just say that they are there because the lending industry has a strong lobby that gives money to many politicians' campaigns. And while that's partly true, it's also important to keep in mind that, despite their flaws, payday loans may be useful for a very small number of people.
Using Payday Loans to Your Advantage
People who can't get credit cards, don't have friends or family who can lend them money, and can't get an advance from their employer often have nowhere to turn when they need a small amount of cash quickly. Payday loans can be used in these situations, and only in these situations. When this happens, people who want to borrow money need to look closely at the terms of the loan. Even though it is important for borrowers to avoid the "rollover trap," some of them will not. And if you are one of the unlucky few, you need to know what the contract you signed says.
The following things stand out in the contract:
-What the lender can do against you if you don't pay on time
-What the loan's annual percentage rate (APR) is
-What the agency's policy is on rolling over loans, and
-What their track record is with taking criminal action against people who don't pay.
Even though knowing these things and comparing them to other lenders won't change your mind about getting a Payday loan, it will help you limit the damage of these loans and hopefully keep you from falling into the rollover trap that so many Payday Loan users fall into.
