Other LanguagesPayday Loans
One “easy” way to get cash quick is to apply for a payday loan. A payday loan, also known as paycheck advance or cash advance loans, is a short-term, high interest loan taken with your next pay check as collateral. Sounds great, right?!? Sorry; although the advertisements make it seem like free money, this is the most expensive and most dangerous form of borrowing.
Payday loans appeal to younger consumers who often believe they cannot obtain other forms of credit. Advertisers also appeal to those who are deeply in debt and/or have an extremely limited understanding of finances.
Why are payday loans so damaging to your economic health? Just imagine this scenario:
You, as a borrower, request a loan from a payday lender for a short period of time (the average is one to four weeks). After asking for a copy of your pay check and identification card, along with a short application form, the lender agrees to lend you $400. In exchange, you must leave a post-dated check for $460 that will be cashed by the lender on the agreed upon date. What?!? That’s right; you pay $60 in lending fees on top of the cost of the loan.
The “lending fee” or interest on the loan in the above scenario represents an Annual Percentage Rate of over 390%. These fees are ridiculous to financial literacy experts and activits, considering that the average Annual Percentage Rate (APR) for credit cards is around 12%.
For this reason, industry experts recommend that you avoid payday loans in favor of some smarter borrowing options:
- Try a small loan from a credit union.
- Ask for a pay advance from your employer.
- Consider a loan from family or friends (be sure to have the terms of the loan in writing).
- Use a credit card advance.
- Request additional time to pay the bill from your creditors.
Becoming aware of your options before you need a short-term loan is important. Payday loans are an expensive solution to a money management problem.