Payday Loans: The Ugly, Expensive Truth 

All of us have been there. $100 is all we need to get us through till payday. Being in this situation can make anyone feel pretty desperate. It’s that desperation that payday loan providers are banking on. 

Their ads are all over the radio, television, Internet, even in the mail. Check cashers and finance companies are making small, short-term, high-rate loans that go by a variety of names: payday loans, cash advance loans, check advance loans, post-dated check loans. Usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow plus a fee. The company gives the borrower the amount of the check minus their fee. And, if you extend or "roll-over" the loan (say for another two weeks), you will pay new fees for each extension. 

Under the Truth in Lending Act, the cost of credit, including payday loans, must be disclosed. Among other information, you must receive, in writing, the finance charge as a dollar amount and the annual percentage rate (APR). A cash advance or payday loan secured by a personal check is outrageously expensive credit. Let's say you write a personal check for $115 to borrow $100 for up to 14 days. The lender agrees to hold the check until your next payday. In this example, the $15 finance charge over 14 days translates into a whopping 391% APR! If you roll-over the loan three times, the finance charge for borrowing $100 would balloon to $60! 

Alternatives to Payday Loans

There are other options. Almost any other avenue makes better financial sense. When you need credit, shop carefully. Compare offers. Consider a small loan from your bank or small loan company, an advance from your employer, or a loan from family or friends backed by a signed promissory note. While expensive and generally not considered fiscally wise, a cash advance on a credit card would still come with a much lower APR than a payday loan. If paying bills is the problem, ask your creditors for more time and find out what they will charge for that service (a late charge is a cheaper alternative to the payday loan, but not worth doing if negative credit info would result from this arrangement). If you have overdraft protection (sometimes called “ready reserve”) linked to your checking account, you may find the short-term cash you need via this method, and with at a much lower cost. Be sure to consult with you bank to ensure their policies accommodate this strategy. 

If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.