In my part of the country, pay day loan companies have popped up on every street corner. Obviously, business is good. Statistics show that millions of Americans have already taken advantage of these “easy-to-get” loans. Many people use their services to get a “quick fix” of money to hold them until their next payday, or longer. You can usually take out a loan that lasts anywhere from a few days up to three whole months. And, if you have trouble paying back the initial loan, this type of lender will happily extend your loan. You see, pay day loan companies can be extremely generous; but there are serious drawbacks. Before you borrow money, you need to know the truth about payday loan companies.
Being that many Americans are living “from paycheck to paycheck”, getting even a partial advance on your pay can seem to be a godsend. It can enable you to pay your car insurance bill on time, get caught up on an overdue utility bill, or even give you some extra cash to buy groceries and some other necessities.
If you walk into a payday loan company, chances are they’ll welcome you with open arms, no matter what your credit history is. Because, the truth is, they don’t care how creditworthy you are. In fact, their best customers are the ones who have the worst payback record.
Generally, you’ll need to sign a loan contract and then present them with a postdated personal check. Or, you may need to sign an authorization that allows the payday loan company to take money from your bank account. You may also need a paycheck stub or a W-2 statement to prove that you are employed. If you’re retired or disabled, you may need to prove how much Social Security you draw every month.
The amount you’re allowed to borrow will depend on your gross monthly income. You’ll likely be able to borrow a fourth of your income, or up to a thousand dollars limit. So let’s say you want to borrow a week’s net pay, or $500. Your personal check will need to be made out in the amount you borrow plus an interest fee. The amount of the interest will likely be a percentage of the amount you borrow. Rates vary, but you could be charged $65 or more for a $500 loan until your next payday. The payday loan company will then give you the cash you need minus the fee. You can rest easy now that you have $500 in your pocket to pay your bills with. You walk out the door with a smile on your face and a song in your heart. Until your next payday comes around, or your payday loan comes due, that is…
When it comes time to pay off your loan, the company will cash your check or withdraw the money you owe them from your account. Let’s say you deposited your weekly paycheck which was $500. Here’s where the truth about payday loan companies will start to dawn on you. The first problem is, that you owe them $565. That means you’re $65. short. If the personal check you have the payday company bounces, your financial institution will penalize you with one or more fees. Plus, your entire paycheck is gone, so you have no money to live on until your next payday which is a week or more away. But, as I said earlier, payday loan companies are extremely generous. In fact, another study shows that nearly all of their revenue growth comes from giving loans to repeat customers. Therefore, you can go back to them and ask for an extension on the loan. Or, you can take out yet another loan until payday.
Let’s say that this time you decide to “play it smart”. Instead of borrowing your whole week’s paycheck, you only ask for $250. Based on your last loan, the interest fee you’ll pay for this loan will be $32.50. But, the truth about using a payday loan company is, that, no matter how much money you borrow, you’re going to pay an exorbitant interest rate. How is paying out a huge fee every week or so when you need to get another loan going to improve your financial condition? You’d be better off taking a cash advance on your credit card. Even if you have a high interest rate and your financial institution charges you a percentage of the advance, you’ll still pay less money back in the long run.
The truth about payday loan companies is that they prey on people who are strapped for cash in between paychecks. A study revealed that Americans paid out more than three billion dollars in costs by using this loan method in 2003 alone. Once you borrow from this type of company, you’ll more than likely get caught up in their borrowing-and-repaying trap.