The Payday Loan Debt Trap

Promises of easy and fast money are drawing people into the vicious cycle of payday loans. Payday loans are secured by borrowing money against your next paycheck or payday. These loans are short-term and charge a very high interest rate. Although you can receive the money as quickly as the next business day, these companies are typically charging consumers $15 for every $100 borrowed.

Payday loan companies prey on people who are desperate for emergency cash for situations such as vehicle repairs or medical treatment. It is easy to fall into this debt trap. Consumers average eight to thirteen loans with the same company before they are able to break out of the cycle. Most payday loan companies allow you to renew a loan up to three times by paying no more than the finance charges for the loan. There here has been some legislation requiring payday loan companies to offer other payment options, such as paying a portion of the principal along with the finance charge. Even with these other payment options available, payday loans are a risky proposition.

Internet payday loan companies are the most notorious. You provide the company with your bank's routing number and your personal checking account number. The risk exists for fraud and security violation of your personal banking account. Many customers complain that once they have paid off the balance of a payday loan, the company continues to debit their checking account.

Before deciding to secure a payday loan, you should check out more affordable options such as borrowing from your credit union at work or another loan company with cheaper rates. You may also want to check with your bank and see if you can apply for overdraft protection for your checking account. Another option is to open a savings account where you make a small deposit from each paycheck to cover emergency cash situations.

Sources:
Don't Get Trapped in Payday Loan Cycle
Federal Trade Commission: Payday Loans Equal Very Costly Cash
FDIC: Special Edition: 51 Ways to Save Hundreds on Loans and Credit Cards
Consumer Federation of America: Payday Loan Facts

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