Risks of Payday Loans

If you think a payday loan (also commonly referred to as a cash advance loan) is a good way to take care of an urgent financial situation you should think twice. Some people who obtain this type of loan end up paying a great deal more than what they borrowed and have a difficult time paying off the loan.

One reason for this is the exorbitant amount of interest charged, which can range between 300 to 1000 percent. This is about ten times the interest a bank or credit union would charge for a personal loan.

With such high fees you may wonder why anyone would choose a payday loan. These loans are geared towards people with bad credit or no credit who cannot obtain the money they need elsewhere. It can be very alluring, especially to young consumers who need fast cash. Typically you can walk into a cash advance center during business hours and walk out with the money you need in about thirty minutes or so. These companies do not check your credit, but they may ask you for income verification and references.

Let’s say you borrow $300 from a payday lender. They may advance you the $300 for a period of up to 14 days with a fee of $56 (fees vary from lender to lender.) However, if you cannot pay your loan in full within that time period, your payments will increase each month because the interest balloons up a high amount in a short time.

Many borrowers who are in dire financial straits are forced to keep extending the loan and end up paying several times the amount they borrowed in fees. It’s a vicious cycle that can leave you in worse shape financially than you were when you obtained the loan.

The Federal Trade Commission (FTC) recommends consumers avoid cash advances and payday loans. Alternatives to these high-interest loans include applying for a loan with your bank or credit union, borrowing from friends or family, taking a cash advance off your credit card if you have one, asking for an advance in pay from your boss and even asking your creditors for extensions on bills you are unable to pay on time.

Establishing a savings account for financial emergencies is also a good idea because it can prevent the need for a payday loan in the first place.