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Payday Loans

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Short on rent money or need to pay your phone bill a few days before you get your paycheck? Same-day payday loans are an attractive option for anyone who needs a short-term loan, an advance on their pay, or who has bad credit or no credit history. But this type of credit can be a very expensive way to borrow money, costing more fees than any other type of loan.

What are Payday Loans?

Payday loans are small, short-term advances on your paycheck. They are offered by specific lending institutions that advertise themselves as giving "paycheck loans" or "cash advances", usually in amounts ranging from $100 to $1,500. These loans are available to anyone who has a reliable job and regular pay, but doesn't have good enough credit or enough time to secure a credit card or another type of loan.

The ease and convenience of a payday loan comes at a steep price: to borrow money for up to 14 days, you should be prepared to spend 10-30% of the loan's value. The standard 15% charge for a one week payday loan is equivalent to a nearly 800% annual interest rate. Some regions set limits on the amount of payday loans or the interest that can be charged, while others outlaw this kind of loan product altogether.

Lending institutions that offer cash advance loans usually require a post-dated check as security. The check must be made out for the amount of the loan plus interest and dated on the day you expect to receive your next paycheck.

Who Uses Payday Loans?

Payday loans are generally regarded as a last resort for short-term lending. They're often used to cover unexpected expenses like dental bills or car repairs, although they can also be used to fund everyday expenses until the next paycheck comes in. Financial experts sometimes call payday loans "emergency loans" and caution that they should be just that: a special type of loan that should be used only in a monetary crisis.

Payday loans can be risky because of their high cost, but they can be very useful for those who don't have access to a credit card or other types of lending. Even consumers with bad credit or no credit history can get a payday loan if they can provide proof of employment, have enough income to pay back the loan, and have a bank account that allows them to write a postdated check as security.

The Downside of Payday Loans

Payday loans are one of the most expensive forms of lending, with interest rates that are considered exorbitantly high by some. Some U.S. states have passed laws that limit the amount a person can receive through a payday loan, designed to protect consumers' safety. It is the people who are most in need of same-day payday loans-those who are behind on their utilities, medical bills, or basic needs like food or rent-that potentially can be the most harmed by them. And statistics indicate that people who use payday loans typically obtain six or more per year, a financially dangerous habit.

Certainly, a payday loan can get you out of a tight spot if your credit cards are maxed out and you're faced with an unexpected expense. But keep in mind that although the cost of a payday advance is usually less than the price of bouncing a check, it's about fifty times the interest you'd spend on drawing the same amount against a credit card and paying it back a month later.