Understanding Payday Loans

If you look up “payday loans” on Google, the first few dozen hits are all websites offering online payday loans and cash advances. These companies advertise phrases like “instant lender decision” or “get your cash today!” They stress immediacy and convenience, but offer absolutely no information on what the structure of their loan is like, what interest is being applied to the loan or what the penalties are like for missing a payment.

The reason why the cost of this convenience is not advertised is because it is unbelievably high. Payday loans typically range from $100 to $1000 and cost from 380 – 790% APR (annual interest), depending on the length of the loan. The higher interest applies to the shortest-term loans. I think a lot of people wonder how companies can get away with such astronomical interest rates.

To answer this, you need to understand what a payday loans is. Essentially, it is a very short-term loan given to an individual to cover his or her expenses before the next paycheck. The amount of the loan plus interest is withdrawn from his/her checking account on a fixed date, when his/her next paycheck is posted. The individuals who are willing to accept such high rates are likely ones who do not have access to revolving credit and do not have available savings. When there is an urgent need for money and seemingly no accessible alternatives, people can feel pressured to accept what they can get. However, many consumers who find themselves in such a situation (where they do not have savings or revolving credit and are desperate for a loan) will not have the money to repay their loan by the agreed date. If this happens, additional financing fees are accrued. As a result, borrowers are forced to enter repeat borrowing cycles with the lender, which will lead to hundreds of dollars in additional debt accrued in a very short period of time. According to the Consumer Federation of America (CFA), consumers have an average of eight to thirteen loans per year at a single lender.

In the United States, the loan volume in the industry was estimated to be 30.3 billion in 2009, with $4.8 billion paid in loan fees. Of all loans, payday loans are by far the costliest, which is why it is very important to be aware of the alternatives available to you, even in a desperate situation:
• Work with your creditors to have more time for your payment, which will give you the time to apply for a personal loan at a bank
• Ask your employer about the possibility for an advance
• Obtain a line of credit from an FDIC approved lender
• Don’t be afraid to turn to friends and family