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Payday Loans Lifesavers or Ship Sinkers
Over the years, payday loans have gained a bad reputation. This is partly because of statistics published
by organizations like the Center for Responsible Lending , who, in 2006, reported that the typical payday loan borrowers pay $793 in
fees on a $325 loan. At costs that high, consumers need to stay away from payday loans. But, the loans don't have to cost that much.
What Are Payday Loans?
A payday loan, also known as a cash advance or check advance, is a small, short-term loan that's usually repaid by your next payday. To be approved for a payday loan, all you need is identification, proof of income, and a checking account. The typical fee is $15 for every $100 you borrow. You write a post-dated check for the amount of the loan plus the fee and the lender cashes the check on your payday.
If you can't afford to repay the loan by your payday, you can extend or "roll over" the loan. You'll pay the fee and your due date will be extended to your next payday. The more you roll over a loan, the higher the cost would be. That's how a $325 loan could end up costing $793 in fees. Many states limit the number of times a payday loan can be rolled over so a single loan won't always cost that much.
Advantages of Payday Loans
Despite the potentially high cost of payday loans, there are some advantages to using them.
For starters, there's no credit check. Approval is quick and easy. If you need money in a hurry and don't have the credit rating to get approved for a bank loan, a payday loan could be a viable alternative.
A payday loan could save you from worse consequences like credit card late fees and non-sufficient funds fees. A credit card late fee might be as much as $39 and a non-sufficient funds fee might be $37 or more if you end up with multiple bounced transactions. If you borrow a payday loan of $200 with a $30 fee and pay it back by the due date, you'll save as little as $7.
Drawbacks to Payday Loan Borrowing
The drawback of payday loans are more publicized than the advantages. The one that's most mentioned is the high annual percentage rate. Payday loans can get expensive if you repeatedly roll them over or borrow new ones. The fees continue to add up costing you more than the alternatives.
If you don't have the money in your bank account when the lender drafts your account, you'll face insufficient funds charges from the lender and your bank. On top of that you still have to pay the payday loan fee.
Payday loans are typically quick fixes to deeper financial issues. It can be like putting a band-aid over a wound that needs stitches. If you're living paycheck to paycheck, the slightest emergency will set your finances into turmoil. Chances are, if you can't afford the emergency today, you won't be able to repay the loan in two weeks. The easy borrowing might keep you from examining your finances and fixing the real problems.
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