Payday loans, or cash advance loans, are one of the most expensive forms of short term money you can get. Typical payday loans charge in the neighborhood of 300-400% annual interest rates, and in some cases, much higher than that. These loans are predatory and target those who have little or no savings and typically live from paycheck to paycheck.
How payday loans are made
When you apply for a payday loan, you write a postdated check for the amount of your loan, plus the loan origination fee (usually around $15 per hundred borrowed). In return for your check, you get the amount of the loan handed to you in cash. The lender then holds on to the check until your next payday and you have the option of allowing the payday loan company to cash the check, repay the payday loan company the amount of the check (the loan plus the fee), or you can extend your loan for another 2 weeks for another fee.
If you get a payday loan online, the money is usually direct deposited into your savings or checking account, minus the origination fee. You then repay the payday loan company via an online money transaction.
With these extremely high interest rates, it is not uncommon for some people to end up paying more in fees than the amount of money they borrowed.
Why payday loans are so bad
Payday loans typically charge about $15 or more per $100 borrowed. Standard payday loans usually cover a two week period, so that equals a 400% annual interest rate! Credit cards are usually considered a bad deal if you are paying more than a 20% annual interest rate. As much as I hate to say it, using credit cards for short term loans is usually a better deal than using payday loans.
How to avoid using payday loans
Budget your cash. The first line of defense is to avoid the need for a payday loan, and the easiest way to do that is to budget your funds accordingly. You will want to tighten your budget to the point that you have a positive cash flow every month.
Have an emergency fund. You should try to keep several months worth of income in a savings account to use for emergencies. It may take awhile to get several months worth of income saved, but it is well worth the peace of mind.
Apply for a small loan from your bank. Your bank may be willing to extend you a small short term loan, particularly if you have been banking with them for awhile, or if they are a small local bank or credit union. It doesn’t hurt to ask!
Get a person to person loan. P2P loans are unsecured loans similar to what you would get from a bank, but you get them from individuals willing to lend you money based on your credit score and situation. Read more about P2P loans.
Use a credit card. I don’t normally recommend using credit cards when you can’t pay them off right away, but you will pay a lot less in interest on a credit card than you will for a payday loan. Just do your best to pay off your credit card as quickly as possible.
If a payday loan is your only option, try to borrow as little as possible and do your best to pay it off as soon as possible!