Payday lenders offer tempting short-term loans for a fee, usually due on a payday. They can also be called: cash advances, check advances, check advance loans, post-dated check loans or deferred-deposit check loans. The premise is simple; lenders offer cash loans to working individuals who secure their loan with a post-dated check including a fee for the loan. On payday, the borrower can either pay the full loan back or roll it over into another loan for an additional fee.

At first glance, payday loans may seem appealing, especially around this time of year when families often need additional money for the holiday season. While payday loans may seem like the answer to a holiday budget crunch, they usually end up causing even more financial distress, and are often the beginning of a vicious and very expensive cycle that can prove almost impossible to escape. Many borrowers don’t foresee how fast interest and fees on these loans add up. Most people considering a payday loan are on a tight budget and are already living paycheck-to-paycheck and cannot afford to pay the entire loan back out of their next check. Payday lenders anticipate this and usually offer the borrower a chance to roll the loan over for another two weeks until the next payday, for a fee of course. The cycle of rollovers can quickly build up, especially if individuals start borrowing from several different payday lenders, and can lead to an endless cycle of debt. When someone is living from paycheck-topaycheck, a payday loan may force them into debt consolidation counseling or even require them to seek good bankruptcy lawyers.

The fees and interest rates on payday loans can be astronomical. It is common to see interest rates between 300% - 1500%. Compare this to typical interest rates on cash advances on a credit card, usually between 20% - 35%. Lenders are required to provide individuals with a full disclosure of the APR on the loan and must also provide a written loan agreement. It is very important to carefully read the loan agreement and understand what the interest rate on the loans will be. If you know you can’t pay the full amount back, consider how much you would be paying if you have to roll the loan over several times. Make sure you read that last column on the loan disclosure statement. The last column shows the total amount you will pay before this debt is paid off. You might be surprised and hopefully, it will make you think twice before taking a payday loan.

In my opinion, payday loans should be avoided at all costs. Proper budgeting and establishing an emergency fund are the long-term answers to avoid the need for a short-term loan, but we all know that this is easier said than done, and the only thing that can be expected is unexpected expenses. Alternatives include: borrowing from family members, credit unions, banks, employers, or credit card cash advances. These loans are likely to be at a significantly lower interest rate and contain more favorable terms for the borrower.

Putting off the purchase until you save enough money would help you avoid all interest rates and fees. A payday loan may seem like an easy solution to the holiday cash crunch, but avoiding them and considering other alternatives could keep you out of bankruptcy!

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This entry was posted on Thursday, December 8th, 2005 at 2:47 pm and is filed under Bankruptcy Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.