Money Talk Monday: What you need to know about payday loans

By Debra Avara


Payday loans are small loans, usually a few hundred dollars or less and are short term (two weeks or so). Basically, you are borrowing against your next paycheck. To get a payday loan, you typically write a check for the amount you are borrowing – plus a fee. You usually leave the check with the lender, and they cash it once you are ready to repay.

If you can’t repay your payday loan when it comes due, you can “roll it over” so that the loan is extended. If you can’t repay it and don’t roll it over, then the lender will cash your check and you may be facing bounced check fees now. And the lender may also sue you or send your account to collections, which will ding your credit.

These loans usually carry a high price tag. Finance charges are from 15 to 30 percent of the amount being borrowed. Since it’s 15 to 30 percent on just a few weeks, it’s comparable to getting a loan with an annual percentage rate of nearly 800 percent. This means if you borrow $200, and you are paying 20 percent interest, you are paying $40.00 for the loan for the 2 weeks.

Companies often prey on lower income neighborhoods. The down side to this is most of these people are already experiencing financial problems and borrowing money with such a high interest rate just makes matters worse. In addition, many of these people find themselves unable to repay the loan when it comes due. This situation leads to additional bank charges for bounced checks and the cost of the loan, or they have to extend the loan causing even more fees, ending up trapped in a vicious cycle. They pay the loan off on the next payday, but discover they do not have the funds needed to cover their expenses. They then find themselves going back for another payday loan. This cycle can continue indefinitely since there is no limit on how many times a person can get this type of loan.

Best strategy, make a budget and stick to it. Get rid of expenses you can’t afford. Do your best not to get payday loans.

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