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Are Payday Loans a Rip-Off?

If you are short on cash and desperate to access even a few hundred dollars, you might be considering taking out a payday loan. These short-term loans are typically contracted for 2-4 weeks or less, and borrowers sign checks or grant electronic access on the due date of the loan. The loan amount, plus fees from an extremely high interest rate, are due on “payday”, along with processing fees.

You won’t be required to submit to rigorous credit checks like you would for a traditional loan. Typically the only things that you will need to supply will be proof of a regular income and an account at a banking institution. This essentially is why the interest rates and fees are so steep with payday loans – the lenders are in a sense taking on higher risks because they don’t put forth the effort to complete credit checks or extensive groundwork.

Payday Loans Can Be Worse Than Credit Cards

You’ll almost never hear a financial advisor recommend that you use a credit card in order to acquire a cash advance. However, if you put the payday loan up against the credit card cash advance, you can see just how much more the same loan amount will cost you through the payday loan quick fix.

Payday Loans Vs. Credit Card Cash Advances.

• If you borrow $300 in a cash advance on a typical credit card and you repaid that amount in one month, you would incur a finance charge of approximately $14 and have an annual interest rate of more than 55%.

• Compare that rate to taking out a payday loan for the same $300 amount. That payday loan on average will require a $17 fee for every $100 borrowed, and if you renewed your payday loan one time (so it averages the one month you held your credit card debt), your annual interest rate could easily be a few hundred percent.  The difference in points when it comes to APR can mean the difference between being able to pay your debt and defaulting on a borrowing contract.

The Risks of Payday Loans

Before you sign on the dotted line for the payday loan, consider the ramifications that could follow you long after your loan comes due.

• Most people who borrow through payday loans do not just borrow one time. Borrowers tend to contract for payday loans on a vicious cycle, each time falling further behind in their overall financial situation.

• The enormous fees, both the APRs and processing fees, make payday loans financially dangerous. If you are in such a dire situation that you are contemplating a payday loan, chances are that it will be difficult, if not impossible, for you to pay back the loan in full and on time.

• Defaulting on your payday loan could result in the lender taking you to civil court, where you could be held responsible for the loan amount plus court costs. This could mean that your wages are garnished or you are required to sell assets and property in order to afford to repay the loan.

• Defaulting on your payday loan might also cause your banking institution to seek criminal charges against you if it appears that you had little or no intention of fulfilling your payday loan obligation.

• Your credit report will reflect the fact that you had to acquire a short-term payday loan. This will be a part of your report, even if you pay off your debt on time and in full. This might easily raise red flags for future lenders for things such as home mortgages or vehicle loans. If future employers run credit checks it might also negatively reflect on you and your capabilities of decision making to see that you needed to turn to a payday loan.

A short-term payday loan with extremely high interest rates and fees is almost never the best option for people struggling financially. The risks are so high, and the rewards are so temporary. Before you sign on the dotted line and take out a payday loan, consider if it really would be worse to miss your car loan payment for one month, or be unable to pay your payday loan amount in full.


About Moe Bedard

My name is Maurice Bedard, but most people call me Moe. I am the founder of America's #1 Mortgage Forum, LoanSafe.org, and also a website design firm called We Create Web Designs. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications. I currently live in Carlsbad, California with my beautiful wife and children.

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