If you need money quickly, you might be tempted to apply for a payday loan, a high-cost, short-term loan, usually for $500 or less, that is due close to your next payday. However, whether they come from an online payday loan lender or your neighborhood check-cashing store, these loans have high costs that can be difficult to recover from and should be viewed as a last resort afterward, having exhausted all other options.
Payday installment loans are usually small amounts of cash that are received quickly and must be paid off in one payment. If not paid in full by the due date, additional charges are usually applied, and the due date is extended. This can lead you to fall into a vicious cycle that starts, again and again, incurring more and more charges.
As a result, payday loans increase the possibility of bankruptcy.
Suppose, for some reason, you are short on rent this month and need $400 fast. So you decide to apply for a payday loan.
Unlike a bank loan or credit card, which primarily base loan costs on an interest rate, most payday loan lenders charge you a fixed fee when you take out a loan, usually $10 to $30 for every $100 borrowed. When that’s compared to what you might pay in interest on other types of short-term loans, this turns out to be one of the most expensive ways to get cash fast.
With a flat fee of $20 for every $100 borrowed, a $400 payday loan could start with $80 in fees.
According to a Creditcards.com survey, for a cash advance. The average credit card charges a 5% fee and an Annual Percentage Rate (APR) of 24.8%. That adds up to approximately $29 when paid in 30 days.
Warning: How Charges Add Up
Most people plan to use a payday loan for a week or two but end up not being able to pay it back right away, and that’s the danger. Every time you extend your $400 loan, that initial $80 fee is charged again. Before long, those fees exceed the initial loan amount.
The average borrower borrows $375 and pays an additional $520 in interest and fees.
More reasons to be careful
Many lenders require that you write them a post-dated check to pay them back. This simply means writing a check and putting a future date on it (the date you plan to pay off the loan). On that date, the lender will cash your check. If your check is bounced, you may be charged even more, and your bank will be too, often for a penalty of about $35.
Payday installment loan lenders can withdraw money directly from your bank account. If the funds are not available, you could face overdraft or insufficient funds fees from the bank and lender.
Before looking for a payday loan, consider one of the many options. You can start by calling your creditors or loan servicer to see if you can get an extension on your payments. An additional or late fee may apply.
You could also choose to apply for a low-dollar loan with your credit union or a small loan company. Or maybe you want to consider a credit card cash advance. Either way, be sure to compare APRs and other associated costs to choose the least expensive option.