Payday Loans – A Convenient Last Resort

Payday loans have been making headlines in recent years, and much of the news has been negative. These loans, also referred to as cash advances, paycheck loans, and a plethora of other names, are basically short term loans with very high annual interest rates which are extracted from the borrower in the form of transaction fees. Payment of the balance of the loan is normally scheduled for a person's next payday, or up to a month later, unless the loan is "rolled over." Lenders assert that they provide an essential financial service to people who might otherwise have difficulty obtaining a loan. Many lawmakers want the payday loan industry regulated more strictly and interest rates capped to some maximum amount they deem appropriate.

The primary issue these lawmakers have with payday loans is the interest rates that they consider usurious, claiming the industry targets low income consumers and traps them in a devastating cycle of debt. A typical borrower with a loan amount of $250 who is required to repay $325 in fourteen days is being charged an annual percentage rate of around 782%. Opponents call this type of lending practice predatory, and would encourage consumers to do business with a traditional lending institution like a bank or credit union.

Payday lenders claim their fees are justified in light of the short terms that the loans carry. A $250 loan extended for two weeks at 25% interest rate would return about $2.40, not enough for a lender to remain in business. Another argument is that although the interest rates seem exorbitant, they are still a better option than facing bank overdraft charges or damaging one's credit by making late payments to creditors.

Another problem with cash advance loans is the fact many borrowers roll over the loans multiple times, each time incurring additional fees. There are numerous instances of borrowers flipping or rolling over a loan more than five times, and eventually repaying more than twice the original amount borrowed. While a payday loan can be an easy solution for a financial emergency requiring fast cash, they are not meant to used regularly. You should consider other methods of financing if your credit score allows and you have time to wait.

Most people have at some point experienced a crisis requiring quick cash, whether to pay a utility bill and avoid an interruption of service, or to cover a shortfall in their checking account. Responsible use of cash advances in certain situations is not disastrous; however, statistics show that many people do not use these loans responsibly. A significant percentage of payday loans are taken out by repeat customers who have used these services ten times or more in the previous year. Reckless use of high interest loans will almost certainly lead to financial ruin.

When you have an unexpected cash shortfall, you should consider other borrowing options before getting a payday loan. Home equity loans and home equity lines of credit offer a low interest alternative if you own a home and have a longer time frame in mind. If you decide to get a payday loan it would be wise to shop around. If you can't find a lender locally you can compare lenders online. While cash advance companies have interest rates far higher than traditional lenders, there can be significant differences in fee structure and time allowed to repay the loan. Read the fine print carefully: some lenders will automatically roll over your balance and charge additional fees unless you elect to pay the loan in full on your next payday.

Despite their bad press of late, payday loans can be a convenient way to cover an unexpected bill or get fast cash. Choose a lender that is up front about their fees and business policies, and responds quickly to questions and concerns of potential customers. As long as you use them rarely and avoid rolling them over, these loans can be a valuable resource in a financial crisis.

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