Beware of Payday Loans
By Teresa Ambord
If you've never had the honor, here is how payday loans work. They are usually for a term of two weeks, maybe less, and generally range from $100 to $500. The lender will ask to see two pay stubs, a bank statement, and ID. You give the lender a post-dated check for the amount of the loan, plus a fee, and the lender holds the check until your payday. On payday, you redeem the check with cash, or else the check gets deposited. If you can't cover the loan, it rolls over to your next paycheck, and the interest mounts.
For people who are not positive they can repay the loan and the fee without making them unable to survive till the next payday, payday loans can be an attractive trap. Another warning... as stated above, the typical loan is for two weeks, because that is the length of time between paydays. But if you take out a payday loan a few days before payday... you pay the same fee, but in many cases, the loan is still only until payday. On a $100 loan, the interest is generally $15. That doesn't sound bad. And if you repay the loan in two weeks and walk away, you are probably fine. But payday loan businesses thrive on those customers who cannot make the payment and end up paying enormous fees. That's why these types of payday loan companies target very young people, and people who carry a high debt load or have gotten high-risk loans before. Some people call this loan sharking, but in 35 states, it is perfectly legal.
There are a couple of scenarios when a payday loan might not be a bad idea:
- You start a new job that has a different pay period than the old job and you have to wait longer than usual for that first check. Especially if the new job pays significantly more, and of course, if you pay the loan off in two weeks and don't return, you're probably okay.
- If the only alternative is to let checks bounce and the bank charges and vendor charges would be more than the interest, you can cover yourself for the few days it takes until payday. It's probably still a sign that you're spending too much or making too little, but it's better than bouncing checks.
Before you go for a payday loan, check all the other possibilities:
- Does your checking account have overdraft coverage? If so, it might be cheaper to allow a check to be covered by your bank for a small fee.
- Can you get an advance from your job?
- A cash advance from your credit card would probably be less interest and risk than a payday loan.
- Talk to your creditors and ask for more time.
They may be willing to wait a bit for a fee smaller than the interest on a payday loan, and with less risk. Before you back yourself into that corner, try all other possibilities first. It may seem silly, but you can start saving money with only a dollar per payday. One secret is to put your little savings in a place where you won't see it again until the next payday when you add another dollar. Saving becomes addictive and with any luck, you'll soon want to increase the amount you add each payday. And it just might add up to enough to get you past the next rough patch without resorting to a payday loan.
