Payday Loans Aren’t the Answer to Debt

Beware of high cost financial services such as check deferral or payday loan services. Payday loan services enable cash-strapped consumers to borrow against their next paycheck. The average fee for a payday loan is $15 - $25 per $100 borrowed and is due in full your next payday. These are short-term, small loans that typically range from $100 to $500.

To get one, you write a post-dated check, or you don’t allow the lender to deposit the check until you get paid. On payday, you take cash to the lender and exchange it for your post-dated check, or you allow the lender to deposit it. If you do not show up with the cash, the lender cashes the check. To make matters worse, most lenders allow for the original loan to be rolled over to the next payday for an additional fee of $15 to $25 per $100 borrowed. To have the lender hold the loan for another pay period, you pay the fee a second time and the loan rolls over. So if you pay a $15 finance charge, the loan carries an annual percentage rate of 391%, and you roll the loan over 3 times, you wind up paying $60 to borrow $100. The national average annual percentage rate for two-week payday loans is 474%.

Consumers who take out payday loans often find themselves needing additional payday loans to pay off existing loans. The original loan can start a vicious cycle of borrowing from future earnings to pay today’s bills. How do you break the cycle? The only way to stay out of financial trouble is to spend less than you earn.