We have all seen the advertisements for them. I’m talking about payday loans. They claim to offer an easy way out of debt. One company even says they are “your cash solution”. These finance companies make it seem like free money. Payday loans are also called high-risk loans, loan sharking or cash advance loans. They actually are short-term loans with very high interest and in most states are perfectly legal.

Payday loans appeal to younger consumers, people with limited understanding of finances and those who are deep in debt. According to the FTC, payday lenders usually look for people who are high in debt or have a history of using high-risk lenders.

Here is a typical example of how a payday loan works: the borrower requests a loan for a short period of time, usually one to four weeks. They provide the lender with proof of employment and identification. In exchange for cash, they leave a postdated check with the lender that includes the “payday loan fee”. The cost might seem low because the borrower paid $115 to borrow $100 for two weeks. While this may not seem like much, if you calculate the loan cost in terms of APR (Annual Percentage Rate) that $15 explodes to 360 percent interest.

If the borrower continues to have financial problems and cannot pay back the loan as promised, the interest keeps building and so does the debt.

The Federal Trade Commission’s recommendation is to avoid payday lenders. Here are some safer options for short-term loans:

• 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. Remember that spending more than you make is ALWAYS a trap, and payday loans are an expensive solution to a money management problem.

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