Payday Loans Create Debt Quicksand

Unbiased financial information provided by Financial Finesse

 Ads for a rapidly rising phenomenon called payday loans pop up daily on our televisions and radios, and in newspapers and our email. What is a payday loan? They are usually small, short-term, high-rate loans that may also be called cash advance loans, check advance loans or post-dated check loans.

Here is how it usually works:

 The borrower writes a personal check payable to the lender for the amount of the loan plus a fee.
That fee can be a healthy percentage of the loan amount - healthy for the lender, not for you. So, even if you pay back the loan on time, you've paid a high price for a short-term loan.

If you extend or "roll-over" the loan -- until the next payday -- you'll pay additional fees every time.

...this is the most expensive type of credit available.The good news is that you don't need to have a credit history to get a payday loan, but the bad news is that this is the most expensive type of credit available. Here's an example - you write a check for $345 and receive $300 cash.

 Don't just shrug it off as the cost of getting cash quickly. If you're still strapped for cash two weeks later, you can roll the loan over - and pay an additional $45 each time. If you continued this each payday for a year, you would have paid over a thousand dollars to borrow $300!

 According to a study by the Center for Responsible Lending the payday lending industry now accounts for $28 billion in loans each year. And over 90% of these borrowers roll over the loans, keeping them trapped in a never-ending cycle. The cost to American families is over $4.2 billion a year.

 Repeated renewals of the loan can end up costing more than 400% interest.Since repeated renewals of the loan can end up costing more than 400% interest, why do people take advantage of payday loans? Often it's because they don't think they have any other choice. While the options below are not great financial planning moves, any of these might make a better source of cash than a payday loan:

• Reducing the tax withholding from your paycheck
• Retirement plan loan
• IRA withdrawal
• Credit card cash advance
• Cash-value life insurance loan
• Pawning a personal asset
• Salary advance (if your employer offers it)

 If you do take a payday loan, what happens if you can't pay it back? If you don't roll the loan forward (and pay another fee), the lender will try to cash your check - generating hefty fees for non-sufficient funds, as well as bounced check charges from the lender. And, you subject yourself to possible criminal penalties for writing bad checks.