Surprising Facts about Payday Loans

MAY 07, 2012

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When youre in a jam and need money to carry you over to the next paycheck, where do you turn? Maybe youre already deeply in debt, and have tapped other sources of quick money, like family and friends. Or perhaps you dont have good enough credit to get a traditional loan? You might consider a payday loan as a possible solution.

But is that the best move? Before you sign on for one of these short-term, high-interest loans, it pays to know some facts about payday loans.

How it Works

A payday loan is a short-term loan, usually for a small amount, that you borrow with the promise of repaying when you get your next paycheck. Often, getting one is as easy as demonstrating to the lender that youll be getting a paycheck usually by showing a paystub or other proof of employment.

Once you get your paycheck, youre expected to repay the loan — principle and interest promptly out of that income.

The Advantages

Really, payday loans have just two big advantages for consumers: theyre easy to get and you can get one quickly. For those really strapped for money, the prospect of walking into a loan office and walking out with cash can be very enticing. You probably wont need to submit to a credit check (so no ding on your credit report from a hard inquiry) and the only paperwork youll need to bring is proof of employment.

Once youve shown proof of income, most payday lenders will then ask you to write a check for the total youll owe and predate that check for the end of the loan term. The lender pledges to hold the check and not deposit it until after the specified date when, in theory, you should have the funds from your next paycheck to cover the loan repayment.

The Disadvantages

There are a lot of drawbacks to taking a payday loan, but the one you should be most aware of is the incredibly high rate of interest charged by most payday lenders. The lowest-rate payday loan can still be significantly more expensive than the most expensive credit card rate.

Right now, the average credit card interest rate is just under 15 percent, according to . The average rate for cardholders with bad credit is just under 24 percent. By contrast, the average payday loan rate is triple digit, and varies widely depending on how long you take the loan for.

Whats more, that payday loan may actually drive you deeper into debt. If the lender cashes your postdated check before youve deposited the funds to cover it, youll incur bank fees for bouncing a check. Some lenders are even prosecuting borrowers for passing bad checks.

When it comes to payday loans, only you can decide if the negatives outweigh the urgency of your particular situation. Hopefully, weve armed you with some facts about payday loans that will help you make an informed decision.