The True Cost of a Payday Loan

It sounds so easy, for just $15 you can get the $100 you need for your medicine. No waiting, no credit check. And unlike credit cards, you will pay it of on your next payday. So what could be so bad about a payday loan?

Payday loans are a bit like double cheeseburgers, you know they may kill you in the long run, but they feel so good! Like that golden disc of cholesterol, one every great once in a while probably won't be your undoing. Become too addicted to 2 pounds of dripping beef, slathered with a pound of cheese on a golden bun and your heart will not work very well. While payday loans are not as dangerous to your health, they are very much like that cheeseburger to your financial health.

First, payday loans are too small. Yep, that's right. If your finances are so precarious that a hundred dollars throws you into a panic, you need more help than a payday loan. You need help and a plan. A good counselor can look at your finances with you and find a longer lasting solution. Of course, this takes time, so the payday loan may be today while you go talk to the counselor. The certified credit counselors from the National Foundation for Credit Counseling are free or have very low rates. They can help you figure out why you needed the loan.

Next, payday loans have very high fees. Yes, $15 does not sound like much but that can be 400% interest. You thought that 30% credit cards are high! They get away with exorbitant interest rates by calling them "fees". The initial fee normally is not so bad, but they encourage you to "roll-over" your loan. This means, basically, extending the loan for several pay periods with an extra fee each time. You can end up paying $90 for a $100 loan. Because they are so small and have such a short time, these are the most expensive loans you can get.

Finally, that payday loan can cost you your freedom. In America we don't have debtors' prisons, but it is illegal to write a bad check. If you write a post-dated check to a payday loan company and then can't pay it, they can have you arrested. They can then use the criminal proceedings against you in civil court.

These are not nice people. They have been known to get judgments of five times the original loan, plus court costs. Even if it isn't a post-dated check loan, if you can't pay, they will turn you over to a collection agency. This will ruin your credit. Not to mention that collection agencies are not known for being nice. Payday loan companies are not the Mafia, but they might not be far off.

If you can pay the fees and really need the money, a payday loan can bail you out of a tight spot. Just be sure that you're ready to pay the costs.