If you’re ever tempted by a loan to get some quick cash before your next payday, be aware that the fees are expensive. Whether it’s a payday loan (sometimes called a “cash advance” or “check loan”), car title loan, or tax refund loan, the interest rates are extremely high, and you can quickly fall into a trap trying to pay back all of the fees.
What is a payday loan?
Payday loans are usually for a small amount ($500 or less) and are typically due on your next payday for the amount you borrowed plus a fee of $10 to $30 for every $100 borrowed. Let’s say you need $300 for a car repair. The lender might ask you to write a check for $340 that would be dated for your next payday and would give you $300 in cash or check. They may even deposit it electronically into your checking account. If you do not repay the loan at the end of the term, and you “renew” or “rollover” the loan, you will be charged additional fees and finance charges.
What is the big deal?
It is very costly to get trapped in a payday loan cycle, continually taking out another loan when you can’t pay the previous one back. The annual percentage rate (APR) can average 400%, whereas credit cards can range from 12% to 30%. Since these loans don’t require a credit check, getting one to pay a short-term expense may sound like a good idea if you don’t have access to a credit card, but it is very easy to get into trouble.
This type of loan is banned in some states, such as New York. Other states have specific regulations about amounts that can be borrowed and how much the lender can charge for the loan. You have to be careful though and read the fine print on the payday loan offer and understand your rights. The laws vary widely, and payday lenders may work around the regulations by partnering with banks based in other states.
What are the alternatives?
Ask yourself if you really have an emergency. Never take out a payday loan to cover living expenses such as your rent, utilities, food or credit card bills. You never want to get a loan that has 300% interest to pay back a credit card bill that has 20% interest. Is it possible for you to wait to pay that bill until your next paycheck? Think about a $25 late fee on a bill instead of a $50 charge (or more) on a payday loan.
Emergencies are hard to predict, but you can plan ahead by saving enough money to cover living expenses for two months. If that is too much, set a goal to save the amount of one paycheck. Are there other ways that you can cut expenses, get a second job, or negotiate a payment plan with your creditor? You will be much more financially stable in the long run.