A payday loan—that is, a cash advance secured by a personal check or paid by electronic transfer—is very expensive credit. How expensive? Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll over the loan and are charged $15 more to extend the financing for 14 more days.
If you agree to electronic payments instead of a check, here’s what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.
- Consider a small loan from your credit union or a small loan company.
- Shop for the credit offer with the lowest cost.
- Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time.
- Contact your local consumer credit counseling service.
- Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan.
The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck—and still have enough to make it to next payday. Find out if you have—or if your bank will offer you—overdraft protection on your checking account.