The Ins and Outs of Payday Loans
Payday lending has become an extremely popular business throughout America. It might seem odd, but payday lending brings in a lot of money for these companies. Payday loans offer short term money to borrowers - basically an advance on their paycheck. This sounds fine right? There are certainly pros and cons to payday lending and many people completely disagree with the concept of these loans. In fact a city in Ohio recently made payday lending illegal even. Yes, many people are very against these loans. Before you decide one way or another, let's take a look at how they work.
Taking out a payday loan takes time. Some places allow you to do it online, but most require you to go to a branch in person. You need to take several forms with you. The company needs to verify that you will be able to pay back the loan. A payday lending place in Ohio requires two forms of identification, latest bank statement, pay stub, and a postdated check with the payback amount written out. They also need to verify your social security number. That is a lot of information to give out.
Payday loans are very short term arrangements and when your paycheck arrives you are expected to pay back the loan in full. As I mentioned above they expect you to write out a post dated check when you borrow the money - for the full amount borrowed AND the fee. The payday lending company will then cash that check on the day the loan is due. If you are taking out a payday loan you had better be very sure that they money will be in your checking account on the day the loan is due AND that you will be able to live on what is left until the next paycheck.
Believe it or not, not everyone has a credit card. I think we can all agree that sometimes stuff happens and you run short on cash. Not everyone or everything can wait until payday. It might be a week away and they have no food. They might need to make a car payment or have their car repossessed. Maybe their child gets sick and they have a hundred dollar co-pay to see the doctor. Life happens whether we have money in the bank or not. This is where payday loans can help a person out.
The problem with payday loans though, are the astronomical interest rates to borrow a little bit of money for less than two weeks. A site I looked at today showed the interest rate on a $1000 loan to be 26.1% or $261 on top of the thousand originally borrowed. This is equal to an annual percentage rate (APR) of 683%. Wow. Think about it - if you are living so close to the financial edge that you can't make it from one payday to the next is it really going to end well to borrow money with such a high fee attached?
What usually happens when people take out payday loans is that they can't pay the loan back completely and still have money to live on until the next payday. So they keep taking out payday loans. They keep paying high fees to borrow money and they can never get caught up - much less ahead. Payday loans are risky and I believe they are a sign that you are in financial trouble. If you need a payday loan to live between paychecks then it is time for something drastic to change. At some point the cycle has to end. It could end well with you getting back on firm financial ground because you turned things around the lived within your means. Or it could end badly with sinking in debt and possibly filing bankruptcy.
I can see where there is a time and place for payday loans, but they are extremely risky and the costs are very high. I cannot recommend them - in fact I recommend a person do everything they possibly can to avoid these types of loans - if only to avoid paying such high fees. Now that you know how they really work, make a good decision and avoid them.