Payday Loan 101

As the name indicates, a payday loan is a small, short-term loan written against your paycheck. Payment is typically due within a week or two.

Interest on payday loans is notoriously high, leading some to consider this practice a version of loan sharking. Some jurisdictions impose strict limits on payday loan interest, but others offer few if any restrictions. In general, finance charges on payday loans range from 15 to 30 percent for a two-week loan period, translating to an annual percentage rate of 390 to 780 percent.

Industry experts say the use of these loans is on the rise. The California Department of Corporations found in a 2008 report that 1.4 million Californians took out 10 million payday loans in 2006. The department has also stated that payday loans have increased more than tenfold from a decade ago.

Government oversight of the industry is also increasing. The Consumer Federation of America warns consumers to be wary of online payday loan sites, which they found in a survey to harbor a number of security risks. In addition, legislators in several states are pushing for greater regulation of payday loans. The PayDay Loan Consumer Information website lists state-specific laws regarding these loans.

Cycle of Debt

Though some consumers take out a payday loan to meet an unexpected one-time expense, the California Department of Corporations found that a great majority of these borrowers are repeat customers. The department has stated that these repeat customers make up more than 73 percent of all payday-loan borrowers in California.

A payday loan cycle occurs when a borrower is unable to repay the debt he or she has incurred. In this case, the loan is rolled over, meaning it is extended in return for additional fees. These fees can eat up a borrower’s cash, leaving them unable to repay the original loan.

Breaking free of the payday loan cycle ultimately means budgeting responsibly and saving money so you’re not living paycheck to paycheck. If you’re feeling trapped, contact a reputable credit counselor and they can help you get set up on a reasonable repayment plan.

Here are some alternatives to using payday loans.

* Making a payment plan with your creditors.
* Emergency assistance programs from faith-based groups and community organizations.
* Taking out cash advances on credit cards.
* Applying for a small consumer loan. These are much less costly than payday loans, with annual percentage rates ranging from 25 to 36 percent.
* Getting a loan from a credit union. Many credit unions offer their members small, short-term loans – with a longer repayment period than a payday loan.
* Getting a military loan. If you’re an active duty or retired member of the military, you may be eligible for a small consumer loan with annual percentage rates ranging from 33 to 34.99 percent.
* Discussing a paycheck advance with your employer. Unlike payday loans, this is a true advance on your pay – and carries zero interest.

Don’t get caught up in a cycle of debt that can be difficult to break. If you’re considering getting a payday loan, research your alternatives before signing on the dotted line.

Payday Loan 101

Cycle of Debt

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