In a previous article, payday loans were described. Essentially, a borrower writes a check to an establishment for the amount of cash they'd like to borrow, plus the accompanying fee. The lender then holds the check until the borrower's next payday or for up to 7, 14, or 21 days. A 14-day maximum is the typical industry standard.
While prohibited in New Jersey, payday loans are widely available online. Payday lenders market to people who have no place else to go (or who think they have no place else to go) for quick cash. They are especially popular in southern and mid-western states. Payday loan advances are essentially high-interest, short-term loans even though lenders have argued that they are merely charging a fee to hold a postdated check.
This is a true story that illustrates how quickly payday loans can spin your finances out of control. A Tennessee hospital food service worker earning $16,000 a year had no savings and needed $200 immediately to pay bills. A friend told her about a storefront loan office that would lend her money until her next payday. She paid a $38 fee to borrow $200 for two weeks. When payday came, she didn't have the $200 so she extended the loan. She did this for an entire year. A year later, the woman had paid $1,220 in fees. And she still owed the $200. She was quoted as saying, "I never dreamed it could get to be such a mess."
In another true example, a woman paid $45 to borrow $300 for two weeks. She extended the loan again and again. After two years, she had paid more than $2,000 in interest on the original loan. She contacted her state attorney general and joined a class-action suit against the company. She was later quoted as saying, "They are not anybody's friend. You'll end up paying ten times what you borrowed."
There are alternatives to payday loans where people can borrow for a fraction of what payday lenders charge. Below are some suggestions:
·Credit Union Payday Loans--Some credit unions offer payday loans to their members, but at far lower prices than "fringe banking" payday loan companies.
·Advances From Employers--Some employers will provide paycheck advances, if you ask, and will generally not charge any interest.
·Cash Advances on a Credit Card--Credit cards generally charge a higher rate for cash advances than for purchases, plus transaction fees, but nowhere near the APR charged by payday lenders.
·Small Bank or Finance Company Loans--Many banks, credit unions, and finance companies allow people to take out small loans of $1,000 or less. Of the three, finance companies generally charge the highest interest rates (often an APR over 20%) but may consider borrowers with blemished credit histories.
·Loans From Family and Friends--Family and friends may be able to assist you and may or may not charge interest. Be sure to treat the loan seriously and make payments promptly to avoid family problems.
Sometimes people truly don't have any other good options for getting quick cash besides a payday loan. They don't belong to a credit union; have a poor credit history and, therefore, don't qualify for loans or credit cards; and do not have an employer, friend, or family member who can (or will) lend them money. If you must use a payday loan, borrow only as much as you can afford to pay back with either your next paycheck or another source of money that you know is coming (e.g., tax refund, child support).