There's been a lot of news lately about payday loans and their legal status. These loans are
also known as cash advances, paycheck loans, paycheck advance loans, and a plethora of
other names. They are all essentially very short term loans with astronomical annualized
interest rates, that are payable on a person's next payday. Proponents of payday lending
defend these loans, claiming they are providing an essential financial service for a segment
of the population that has limited access to other types of loans. Others, including lawmakers
in many states, want the high interest loans outlawed, capping the interest rates to a level they
consider reasonable. Others support more stringent regulations on the industry.
The main complaint that these lawmakers have about payday loans is the finance charges
which they consider usurious. A typical borrower with a loan amount of $500 who is required
to repay $650 in fourteen days is being charged an annual percentage rate of about 782%.
Opponents call this "predatory lending" and assert that people would get much better terms
with a traditional lending institution like a bank or credit union.
Payday lenders believe the high interest rates are justified, and assert that the short term
nature of these loans justifies the interest rates charged. A $500 loan with a term of fourteen
days and a 25% interest rate would bring the lender a return of around $4.80, not enough to
cover the costs of doing business. And they also argue that the rates are lower than the costs
which could be incurred by a person overdrawing their bank account and paying fees for
returned checks and insufficient funds.
Another problem with these fast cash loans is that a borrower can roll over their loans, in
some cases multiple times, each time incurring another interest charge. There are
documented instances of borrowers flipping a loan five or more times and repaying more
than twice the amount of the principal of the loan. While a payday loan can be an easy fix for a
financial problem requiring money quickly, they are definitely not meant to be a long term
solution. You should consider other lower cost alternatives if your credit score and time allow.
Almost everyone has had an instance where they needed money quickly, whether to pay a
utility bill and avoid an interruption of service, or to cover a shortfall in their checking account.
Responsible use of cash advance loans in certain circumstances can be beneficial; however,
in reality, statistics show that many people are not using these short term loans responsibly.
A huge percentage of payday loans are taken out by repeat customers who have used these
services more than ten times in the previous year. It is almost a certainty that this type of
reckless use of payday loans will get a person into even deeper financial trouble.
If you find yourself in need of money quickly, explore any possible alternatives before choosing
a payday loan. Borrowing money from friends or relatives can be uncomfortable, but it may be
an avenue you could explore. If you decide to get a payday loan, first do some comparison
shopping. You may have a lender in your area who specializes in these kinds of loans, or you
might prefer to do the transaction online. While the interest rates are inherently high, you will
find significant differences between companies in terms of fees and repayment options.
Choose a lender that has been in business for a while, and while it may cause drowsiness,
be sure to read all the fine print. As long as you force yourself to use them wisely (rarely), you
will be able to avoid most of the common pitfalls associated with payday loans.
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