Consumer Credit: Cash Advance Payday Loans

People seeking a quick money fix are all too often greeted with high interest rates and unattainable repayment terms.

Everyone has been through the hassle of running low on money a week before payday. Maybe you need groceries or the car needs repaired, or maybe you just need enough to get gas for a few days. No matter what the cause, being short on funds often leads people to the most convenient option available. It used to be that people pawned something they owned in exchange for cash, planning to buy it back once their financial hardships passed. In this way, pawnshops could make an easy profit because people decided that they needed the extra money more than their valuables. However, recently moneylenders have found a more appealing way to draw the temporarily impoverished in the form of cash advance payday loans.

Let us say one week John Doe finds out his paycheck is not big enough to cover a couple of bills. Since they are due at the beginning of next week, several days before he gets paid again, he has a dilemma. Either John can pay those bills and bounce his checking account or he can wait until he gets paid again. In the first instance, two things can happen. First, the bank may tell his creditors that there are insufficient funds to complete the transaction. The bill will remain unpaid, which will hurt his credit rating. If John has overdraft protection on his checking account, the bills will get paid but he will owe the bank a fee for each overdrafted check. On the other hand, if John waits until the next payday to take care of his bills, he will be charged late fees and may incur a higher interest rate on certain debts. None of these sounds good to John, since he already has a less than perfect credit rating and never seems to have enough money.

That evening John sees a commercial and thinks he has found the solution to his financial woes. A local shop is advertising cash advance payday loans. They say that John can give them a personal check, which they will hold until next payday, and they will give him money in exchange. It is just what he needs! Well, that is not quite true. What the commercial does not tell John is that a very high fee is charged per every $50 or $100 he borrows. In this case, he writes a $115 check and leaves with $100 in his hands. This does not seem like a big deal at the time, but $15 in interest translates into a ridiculous interest rate of 390%. Still, John happily takes his cash and pays his bills with it. Two weeks later, he gets paid, but he finds that there is just not enough money to pay back that $115. He decides to go back and get a two-week extension, which incurs another fee. Week after week, there never seems to be extra cash.

The loan company calls, saying that after three extensions, he now he owes $60 on top of the original fee. Worse yet, they start telling him he will have trouble if he does not pay back the money. Joe is much farther in debt than he was before the payday loan, and now he has creditors breathing down his neck. Eventually, he may have to file for bankruptcy to escape his financial woes. Sadly, this is an all-too-common situation, where people have actually been threatened will jail time if they do not pay back their loan. Thirteen states have either outlawed or tightly restricted the activities of payday loan companies, with another twenty-five states putting a roof on how high interest rates can be. Still, many states consider these loans little better than loan sharking, where interest rates are commonly between 600% and 1800%. Consumers believe these companies are here to help them out, never suspecting that they are being preyed upon with offers that sound too good to be true.

Rather than resorting to borrowing money from a payday loan company, consider your other options. Ask your employer if you can receive your paycheck in advance so that you will not become dependent on the "extra money" from these high-interest loans. If you absolutely need to borrow, go to your credit union or a legitimate loan company with low interest and annual percentage rates. Even credit cards have better interest rates (usually around 24%) for cash advances. If the option is available, consider borrowing money from relatives or friends, who will be not threaten you if you are late in paying them back. Even if none of these options appeal to you, there are other ways of handling the situation. Most creditors are happy to work with customers in need of an extension. Let them know that your payment will be late but will arrive on a certain date. They will likely charge a late fee, but it will be very reasonable in comparison to that of a payday loan. Finally, if you absolutely must get a payday loan, shop around for the best rates available. These stores exist nationwide and on the internet, giving you numerous resources to investigate before signing a contract. Above all, do not jump at the first offer you receive. Do so and you may be doing little more than throwing away your money to interest fees.

In conclusion, payday loans are exactly as they seem: too good to be true. For the average person experiencing financial hardships, paying high interest for quick cash is not the best route. Instead, carefully review your budget to cut out excess expenses and live within your means. If you cannot manage your finances alone, recruit the services of a local consumer credit counseling service. These non-profit groups will help you sort out your money problems and will teach you how to deal with debt in a credit-friendly manner. Think carefully before you reach for the money payday loan companies offer you, keeping in mind how the deal will affect you in the future.

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