Payday loans have become very popular in recent years. It seems like everywhere you look, you can get a payday loan to help you get by until your next paycheck. Payday loans seem like a good idea, but are they really? Sure, they can help you out if you're in a tight financial spot, but there are a lot of important things you need to think about before you take one out.
First, let's look at what payday loans are and how they work. Most of the time, the lender will agree to give you a set amount of money for a set amount of time. Say, for example, you needed $200 to pay for some unplanned costs. You would borrow $200 and write a check with a date on it for two weeks from now to cover the loan amount plus the finance charge, which would be around $60 for a loan of this size. So, the lender thinks that in two weeks, he or she will be able to cash that check for $260 to get back the money they loaned you.
Before you take out the loan, you should really think about whether or not you will be able to pay it back when it's due. Most payday loans are given out over a period of two to four weeks. If you can't pay back the loan at the end of that time, most payday loan companies will be happy to extend it, but you'll have to pay more interest.
This brings up an interesting point: it can be hard to figure out how much interest you're paying on a payday loan if you have to extend it more than once. The truth is, though, that depending on how many times you ask for more time to pay back the loan, you may end up paying at least 300 percent interest. No, that wasn't a mistake. What are they thinking? Because there are no rules about how much interest can be charged on payday loans that are given in this way. With this kind of interest rate, it's easy to see that you might never be able to pay back the loan. Depending on how long you keep extending the loan, you might end up paying much more. Based on our earlier example, if you extended the loan three months after the original due date, you would owe almost $500, which is more than double the amount you originally borrowed.
There are also other problems that can come up when you get a payday loan. For example, if you work with a company that isn't very honest, you may have to pay bounced check fees. This can be a real problem if the lender deposits your post-dated check before the agreed-upon date or if you don't have enough money in your account to cover the check on the agreed-upon date.
When you take everything into account, payday loans can be a risky choice. You should only get one if you have no other options, like getting a small loan from your bank or credit union, borrowing from family or friends, or making a deal with your debtor to wait until your next paycheck.
