The Problem with Payday Loans

What you don’t know could end up costing you

We all have times when we are strapped for cash. Unexpected bills, car troubles and health problems can all drain your bank account in the blink of an eye – and payday loans seem like the easy solution to an often complicated problem. There’s no credit check, it takes just a few minutes and before you know it you’re out the door with a pocketful of cash. But what you don’t know about payday loans can hurt you in the long run. You might end up with enough cash to make it to your next payday, but you’re going to end up paying for it, big.

Here’s the real deal on how much they cost.

Let’s say you need to borrow $500 to get your car fixed. You go to a payday lender, show them proof of employment and write them a post-dated check for the $500 plus fees and interest. They tell you that your interest rate is 30 percent. Now, that might seem like the same interest rate as some credit cards but it’s not. Since the loan is for such a short period of time, a week to two weeks, the annual percentage rate (APR) ends up being over 800 percent.

You read that right. If you take a year to pay that $500 back, it could end up costing you $1,356 or $856 in interest alone. In contrast, a credit card at 20 percent interest would end up costing you $551 or $51 in interest.

Now, we’re not saying that credit card debt is a good thing, because it’s not. We just want to show you what a big difference a short term APR can make to your loan.

The bigger problem (yes, there’s a bigger problem than 800 percent APR) is that come next payday, when you pay off your loan, you’re going to be short on cash again and sorely tempted to get another payday loan. This means, the following payday, you’ll be short on cash. Which means you’ll get another loan, be short again and repeat the cycle over and over again.

Essentially, you’ll be paying a payday lender to use your own money. After just one year of using payday loans for a $500 loan each month, you could end up paying over $1,800 in fees and interest.

The bottom line, payday loans are a bad idea if you’re strapped for cash. Start a small savings account and save for a rainy day, open a low interest credit card for emergencies only (and pay it off each month!) or just do without if you can. Payday loans almost always do more harm than good.