Monday, October 29, 2012

Avoid payday loans


Most folks know the "in-between-paycheck" cash crunch. Your money runs out before the next paycheck rolls in. The car breaks down, the roof starts leaking, the daredevil child falls off his bicycle and lands in the emergency room with a broken arm. The bills need to be paid, but your bank account is running on empty.
Payday loan companies are glad to offer a solution. They open storefronts in strip malls — often in the city's poorest neighborhoods or near military bases — and may even provide access to loans via Internet websites. You can walk into a payday loan store with copies of your driver's license and current pay stub, and walk out with a check. If you apply online (providing similar proof of employment and identification), you can have funds deposited directly into your bank account, sometimes within the hour. The amount borrowed is typically due within two weeks.
But borrowing from a payday loan company is seldom a good idea. Consider these three disadvantages:
  • Payday loans are extremely expensive. Taking out a cash advance on your credit card is considerably cheaper (though not recommended). A typical payday loan of $375 carries an average fee of $55. That works out to 15% interest over two weeks. Carried out to an annual percentage rate (APR), you're borrowing money at well over 300%. A typical cash advance on a credit card is around 25% APR.
  • Payday loans don't address the underlying issues. Although payday loans alleviate financial stresses for a time, the causes behind those problems may remain unresolved. It's better to face financial problems head on. To bring expenses into alignment with income, it may be necessary to adjust your lifestyle or work a second job (at least until the financial picture improves).
  • Payday loans can lead to a debt spiral. Loan companies make tremendous profits from repeat customers. Borrowers extend their payday loans, accumulate fees, and dig themselves into greater and greater debt. The short-term fix becomes a long-term habit. The better loan companies will try to assist you by limiting your borrowing.
If you find yourself strapped for cash, consider alternatives to payday loans. Ask family and friends for help. Work overtime or take a side job. Sell unused items. Eliminate unnecessary expenses. Contribute — perhaps only a small amount at first — to an emergency fund. Increase your earning potential by going back to school. Develop habits of financial discipline. And say goodbye to payday lenders.

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