How to Avoid the Problems Associated with Payday Loans

There is a need for emergency cash when you least can afford it. One alternative that has sprung up in the last few years is the payday loan that you take against your direct deposit paycheck. Sometimes it is even the bank that gives you the option of having a direct deposit advance on your checking account, this is really the same as a payday loan.

Here are some reasons that people take out a payday loan:

No credit check

Cash into your checking account within a day or so

Most lenders will not lend small loans of $200-$1,000 ranges anymore

No collateral except that you have a direct deposit paycheck set up and access to your checking account

No Cosigner needed

And with these reasons you will pay a very high price for having this luxury in an emergency when you are not really looking at the bottom line or the ramifications if something goes wrong and you cannot pay as the terms were agreed to. That is what these companies are banking on is that if something goes wrong they have access to your bank account and they do not let go of that access until they have drained out all that they can legally get. Of course if you use it once pay it as planned you will only have some high interest and a few fees to pay.

The following is an example of what can go wrong and does go wrong if you paying the loan back doesn't quite go as planned:

You need $400 for an emergency within 24 hours, for whatever reason you have to get a payday loan.

The agreement is that you pay this off with your next direct deposit check which is promised within a week or two.

For whatever reason your direct deposit check doesn't go into your bank account in time to pay off the loan within a week or two. (Maybe you were out of work and didn't get a full check)

You will now be billed at over 425% interest for default on a payday loan. (Yes it is written in the contract that you signed, the % rate is usually over 200%)

The payday loan company takes out the last $100 out of your bank account because they have that right to do that.

But they use the money for interest and fees only and none goes to what you owe them. (at this point you will be bouncing checks at your bank and accruing numerous bank fees very quickly as you were already in emergency mode with your money)

The next week comes and you can pay the original payday loan only of $400, but by now you owe $600 or more for the loan because the loan company added the default fees and recovery costs and more interest and the bank is also assessing at least $50-$75 per day or more and they are in no mood to write off any of these fees as that is how they are getting there money now.

That $400 loan can quickly within 2-3 weeks time end up costing you over $1,500 and tons of headaches. I am sure other people have seen this happen and it can be a real eye opener when you realize what you may be risking. Be smart and be careful.