Payday Loans - Convenience and Danger
Every now and then a financial emergency arises that you just did
not have planned in your budget. Maybe you had a fender bender
with the car and you need cash to get it running, but the check
from the insurance company will take a week or so to get here. Or
the refrigerator or washer craps out and you don't have the cash
to get it repaired, but you also can't afford to be without it.
You have run out of money before you ran out of month. Or, you
have a once in a lifetime chance to buy something you really,
really want at a spectacularly low price, but don't have the
One solution to your "one time only" dilemma could be a Pay Day
Loan - this is where loan companies will give you a short-term
loan, just until your next payday. If you qualify, many of the
companies will lend $100, to as much as $1500, for a short period
of time. Mostly what you need to qualify is a job that provides
you with a regular paycheck and an active checking account. You
will probably need to show them a recent paycheck stub and they
will probably call to confirm that you haven't just been laid
off and, therefore, have no next paycheck coming.
A loan for a car or a boat, or a mortgage to buy a house, are
secured loans - the value of the asset serves as security for
repayment of the loan. A Pay Day Loan is an unsecured loan -
there is no property to serve as security, only a contractual
promise to pay. It is a signature only loan. Usually this kind of
loan is for a term of not more than two weeks.
Pay Day Loans may be convenient, if you have an occasional need.
But this kind of loan is very expensive. Typically the fee to
borrow $100 for two weeks is over $15, more than 15%. The annual
percentage rate is staggering.
If you take a Pay Day Loan, the loan company will probably
require that you give them a post dated check for the full amount
due (including their fees). Come pay day you are expected to show
up and pay the amount due in cash - and they will then give you
back the post dated check.
If you are not able to pay off the principal amount on the due
date, the terms of the loan agreement may allow you the option of
renewing the loan by paying just the interest due, bringing your
interest cost for borrowing $100 to a total of $30 for four
If you don't show up to pay off the loan, they deposit your
check. If the check bounces, for insufficient funds (possibly why
you didn't show up in person), you have even greater trouble -
you owe them everything you originally did plus bank fees for a
returned check plus their fees for collecting the money owed.
And, generally speaking, it is against the law to write a check
that is a "bad check". If you do it, legal action can be taken
against you - further complications, problems and costs.
If you fail to pay off the loan, as agreed, the loan company can
file a lawsuit and obtain a judgment against you. With that
judgment they can obtain an order to garnish your wages to
collect the debt owed. Generally the contract also makes you
liable to reimburse the company for all its legal costs and costs
of collection, adding further to the cost of you borrowing.
The most important thing about this kind of credit is to use it
only when you need some money for a truly temporary situation and
where you can fix the situation very quickly.
You may have heard stories of people who used one credit card to
pay off another credit card, then a third to pay off the second,
then a fourth to pay off the third, etc., with their debt
spiraling totally out of control.
Well, the same kind of thing can happen with Pay Day Loans if you
are not careful and responsible in how you handle your finances.
This is not a long term, or even intermediate term, financing
method. This is a one-time-only emergency funds technique and to
use it any other way could be very risky and extremely expensive.
How big is the Pay Day Loan industry? The Center for Responsible
Lending (www.responsiblelending.org/) reported in 2006
that there were about 25,000 outlets in the U.S. making Pay Day
If you were considering a Pay Day Loan it would be worthwhile to
check it out thoroughly before applying and signing those papers.
The Consumer Federation of America is one place where you can get
a variety of information to help you evaluate the situation. The
information there explains, in detail, the mechanics of a Pay Day
Loan. According to the CFA (www.paydayloaninfo.org/),
industry analysts estimates $40 billion in Pay Day Loans are made
every year in the U.S.
No matter where you live, you can probably find a company locally
that will make Pay Day Loans. There are also many companies on
the Internet, which make these loans. As in any business, there
are reliable firms and firms who will try to twist the laws and
regulations as far as possible. Companies who operate on the
Internet are harder to effectively regulate than companies with a
physical office right there on Main Street in your hometown.
If every week in your life is an emergency, if every payday is a
panic, then using Pay Day Loans will probably only make a bad
situation much worse.
On the other hand,
* If it is truly a one-time emergency, and
* You have a clear plan which assures timely pay off of the
* You have researched the potential problems, and
* You have carefully selected a reputable loan company, and
* You have researched and understand all the terms and
conditions of the loan
then maybe - just maybe - a Pay Day Loan is the right thing for
you to do.
Fred Vanhoosen writes about the payday loan / cash advance
industry for www.fastcash4all.net/ To learn more
about these loan products, we recommend reading the following: