Are you in a pinch and need extra money to pay for some bills?  Well, payday loans may be the answer, or maybe they are the problem.  Sometimes debt negotiation resulting in a mutually satisfactory debt settlement program may be a better alternative.

How It Works

But unfortunately for many consumers, payday loans are a last resort or either a quick fix.  To receive a payday loan, a person brings a recent pay stub to the payday loan establishment.  When the loan is received, a fee is charged.  The person receiving the loan writes the payday loan company a post dated check for the amount of the loan plus the fee.  In two weeks, once the customer gets the next paycheck, the post dated check will be cashed.  However, if the person is unable to pay back the loan in full, they will be charged additional fees to keep the loan out until the next paycheck.

Payday loans are supposed to be convenient and short term.  However, many studies have proved once a person has taken out one loan they are much more likely to take out another loan.  The reason for this is because payday loans have huge interest fees and charge often 400% annual interest or more.

The Risks

What happens to many people is that once they receive their next paycheck; they are still unable to pay the entire payday loan in full.  So the loan rolls over and the person has to pay another finance charge plus additional interest in many cases.  The amount of interest payday loans are able to charge is higher than other personal loans or even credit cards rates.  The reason, according to payday loan companies, is because the company is at a higher risk even though the loans are short term and are for small amounts.  Most payday loans are not more than $1000 and are commonly much less.

As a result, many states have created caps for payday loan companies.  The regulations depend greatly on each state and have changed over the years.  There are also different rate caps for Military Service members.

The High Cost of Borrowing

The other reason many people get stuck in this vicious cycle of payday loans is that it is very easy to get the loan.  Most payday loan companies do not check credit.  Usually all that is required is a paycheck showing how much a person is making, a check in the amount of the loan plus fees, and identification.  This simple process is convenient for people who cannot get loans elsewhere and absolutely have to have the money.

At the same time payday loans take advantage of these people, because it increases the chances that they will be unable to pay the loan amount due upon receipt of their next pay check.  Many people go in with the intention of paying the loan back right away.  However, the system for many payday loan companies can make it extremely difficult to be able to pay back the entire loan in a timely manner.

Therefore, upfront payday loans may seem convenient because they are short term and in small amounts.  However, as you have seen, the ultimate price that may be paid would, in fact, be terribly inconvenient.

Please remember that this information is for educational purposes only.  For specific advice and recommendations, please contact a licensed professional.