Payday loans are small unsecured loans used to bridge the gap in between pay periods. Usually this means two to three weeks and sums totaling less than $500. While they may seem very enticing, they are often accompanied by some less than favorable fees and sky high APRs.
Let's Break it Down
First off, you'll be instructed to make a check for the amount you're borrowing payable to the lender. Once you reach the date specified in the agreement clause, the lender will then proceed with payment and cash your check. But what happens if that day comes around and you don't have the funds available to repay it? Well, in that case, you may be given the option to "roll it over" which essentially is just an extension of the borrowed amount. Don't be misled though because fees will accumulate quickly.
Payday loans are some of the most expensive types of loans to take out. You may be charged anywhere from $10 to $30 per $100 you borrow. Excessively high annual percentage rates (APRs) are common across the board with payday loans. This example, on About.com, shows the breakdown of payday loans in relation to other borrowing methods including credit card cash advances and small loans. As you'll see, the APR towers over the other loans by over 300%. Let's say you borrow $300 with the intention to repay it in one month. At the end of that time, after accounting for the finance charge and APR rate, you'll pay close to $100 more in total for the payday loan.
Trying to find loopholes in the systems won't work either. Like writing a bad check for example. If you do this repeatedly you may find your name on the ChexSystems registry which is a tool used by lenders and banks to report such activity. Likewise, your bank will hit you with overdraft charges and you could face criminal action like being sued or having your account sent to collections. All these outcomes are likely scenarios if you don't treat your loans responsibly.
Before you resort to taking out a payday loan, consider a few of the other options available to you. Some preventative measures include saving up money in an emergency account, building up your credit so that you can borrow from a lender with a lower APR fee or having a credit card solely for unexpected circumstances. Another option is to ask around banks and credit unions for their lending options. As the previous example demonstrated, these institutions charge significantly lower fees for the same borrowing amount. Often times, they'll even work with you to set up a payment plan or loan modification.
When Should I take out a payday loan?
There are, in fact, situations where a payday loan may be your only option. These include emergency car repairs, health emergencies or urgent household bills. Read the full review to learn which five companies made it to the top of the list.