Understanding the Danger of Payday Loans

If you’ve ever found yourself in the midst of a financial emergency, weeks away from your next paycheck, you may have been tempted to enlist the help of a quick cash service. Ideally, you’ll have an emergency fund, a credit line or a HELOC (Home Equity Line of Credit) you can use for those sudden, unexpected crises. Sometimes, though, you may be forced to look at other options.

“Payday loans,” which are also called cash advances, check advances and post-dated check loans, have become increasingly popular for fast cash. A payday loan is a short-term loan against your next paycheck. If you’ve seen ads on TV for quick cash services, you probably thought they were too good to be true. Unfortunately, they are.

Here are some things to consider before committing to a payday loan.

How they work

All a consumer needs in order to obtain a payday loan is employment, a telephone, a utility bill, a checking account and a driver’s license. The borrower writes a personal check payable to the lender for the amount he or she wishes to borrow, plus a fee, which is typically in the range of 10 percent to 25 percent of the amount.

That check is held for up to four weeks. At that time, the check is redeemed by the borrower by paying the face amount of the check or allowing it to be cashed. If the borrower cannot cover the check, it can be rolled over for another term by writing another check with another set of fees added to the balance.

Fees

The fees on a payday loan are usually the highest that are allowed by law. A whopping $15 charged per $50 loaned is not uncommon. In a hypothetical scenario, if you borrowed $100, you’d have to write a check for $130. If you need an extension, you’d have to pay a new fee – $45 for the new loan. You’d now owe $175. If this pattern continues, you can be in serious financial trouble very quickly.

Consequences

Consumers may be misled into thinking that payday loans are a cheap and convenient way of borrowing money for the short term. However, they often have difficulty repaying the loan because it leaves little or no money for living expenses. The result is that the borrower pays another round of charges and fees and obtains no additional cash in return.

If you miss a payment on one of these loans, you can be in for terrible consequences. For starters, your credit score will suffer. The terms of repayment can also allow the lender to garnish your wages, seize your car, harass you at home or work, or even take you to court. The contract you sign with a payday loan provider can have all kinds of traps hidden in the fine print.

Before resorting to this type of borrowing, visit the Frenchtown Financial Opportunity Center or call us at (850) 224-4960 to speak with one of our representatives. We can help you evaluate your situation and find a better option that won’t leave you in such a vulnerable position.

*The content provided in this article consists of the opinions and ideas of the Frenchtown Financial Opportunity Center, does not constitute legal or financial advice, and should be used for informational purposes only. Any decisions you make based on the information contained in this article is made in your sole discretion and liability. The Frenchtown Financial Opportunity Center disclaims any damages or liability for decisions you make based on the information provided.

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