I know how tempting it can be to take out a Payday loan when you desperately need to get your hands on some quick cash.
But truth be told, short of going to a loan shark this is one of the absolute worst ways to borrow money.
It’s easy to understand why payday loans are so popular. They’re super easy to get, and in most cases all you need is a check stub to prove that you have a job and a bank account.
You don’t need good credit to qualify because no credit check is required in order to get the loan.
The actual procedure for getting a payday loan can vary a bit from company to company and state to state, but they usually work something like this:
1 – You provide your latest paycheck stub as proof of income and your most recent bank statement as proof that you have a bank account.
2 – You sign an agreement that you’ll pay the loan off when it comes due (which is typically on your next payday).
3 – The loan company tells you how much you will be allowed to borrow.
This amount can be either a percentage of your weekly, bi-weekly or monthly pay or that entire amount.
4 – You write a check to the loan company for the amount of the loan.
5 – You are given the amount of the loan minus the interest and fees for the loan. You either receive this money in cash or it’s deposited into your bank account.
6 – Come payday you go in and pay off the loan.
Sounds pretty simple and easy, right? Well, it is! But payday loans have several extremely serious downsides:
1 – They are super-expensive. In fact, the interest/fees for the loan can be as high as 30%!
2 – You don’t receive the full amount of the loan up front.
For example, let’s say you borrow $200 and the fee/interest for the loan is 30%.
You will only receive $140 because the $60 fee is deducted (i.e. paid) up front.
3 – You will have to repay the loan in full the next time you get paid.
When you go in to pay off the loan you make the payment in cash (or with your paycheck) and the check you originally wrote to the loan company is returned to you.
The problem is if your financial situation is so bad that you needed to take out a payday loan, there’s a good chance you won’t be able to pay off the loan come payday.
As you can see, this procedure is fraught with danger.
If you can’t pay the loan in full on your next payday you’ll have to pay another 30% (in this case another $60) for the privilege of extending the loan for an additional pay period and write another check for the full loan amount for the loan company to hold as collateral.
For many people this becomes a never-ending cycle because they can never manage to come up with enough cash to pay off the loan in full.
Therefore they just keep making that 30% extension payment every payday for weeks, months and even years.
In short, they can easily end up paying thousands of dollars in extension charges on what was effectively a one-time $140 loan!
What’s more, things can get even worse…
If at some point the borrower stops making the extension payments the loan company will deposit the check they have on file – and it will almost certainly bounce.
Now the borrower has another legal headache to resolve – getting arrested for passing a fraudulent check!
Bottom line: Most people will have a hard time financially at some point in their lives.
If you ever find yourself in dire need of some quick cash, I strongly recommend that you explore every other legal option before taking out a payday loan.
Sell something you own to raise the needed cash. Beg a friend or family member for a short-term loan. You might even consider standing on a street corner with a tin cup and a “Please help!” sign in your hands.
None of those are great options, but they’re all better options than going into perpetual debt for a super-expensive loan that you might never be able to pay off (and could even land you in jail).
If you’re already caught in the payday loan cycle you really need to find a way out of it. Here’s a short video with a few tips that might help.
Note: As always, you can watch the video at full screen
by clicking the “square” icon in the lower right-hand
corner of the video.
Image Credit: Seth Anderson