Your car just broke down and it will cost $375 to fix it - payday is two weeks away and you're strapped for cash. What are your options? If you are looking for some fast cash to tide you over until the next pay period and have bad credit, perhaps you've considered going to one of the Payday Loan companies.
Payday loan companies are sprouting up all over the country. In fact, they are one of the fastest growing financial businesses in the last decade. But how exactly do they stay in business, giving out money based on post-dated checks?
Well, the process is fairly simple. Payday loan agencies offer an individual an opportunity to take a loan for a specific dollar amount for a short period of time, to be repaid with the next paycheck (usually between 7 and 20 days). Most agencies ask the "lendee" to write a post-dated check or give a bank account number to repay the loan on the agreed upon date.
Because this is considered a "short term loan" the standard rules of lending don't apply. The creditor doesn't usually check the individual's prior credit history. So for those with bad credit, the payday loan company is looking for proof of employment (a recent pay stub) and either a check or bank account. For this reason alone, people who are having problems clearing their credit find this option appealing - the money is available when it's most needed and repayment is easy with the next paycheck.
Payday loan companies offer varying rates of interest (sometimes called finances), but as a rule of thumb, they charge about $25 for every $100. To repay a $500 loan, you would pay at least $125 in interest, perhaps more. Remember, this is $125 for the use of the money for two weeks.
For people in a temporary fix, $125 to help them out of a jam doesn't seem like a terrible price to pay. If a person is suffering from bad credit, they may not have a lot of the traditional lending options open, and have some expectations of paying the price for their bad credit.
Some consumer advocates refer to payday loans as legal loan sharking. Their logic stems from the fact that if the loan amount were amortized annually, the interest rate would be somewhere in the neighborhood of 650% APR (you can use this payday loan calculator to find out). Of course, the intention is not to use this money long term, but as a temporary one-time solution to a problem.
Payday loans are a viable option for individuals that can manage their financial situation. If you know that you are going to be able to pay the loan and the service fee in two weeks, this arrangement can work in your favor.
Unfortunately, some people are getting in over their heads with payday loans. Some individuals enter into the agreement knowing that in two weeks they won't have the funds to repay the loan. They are just getting deeper in debt. When the loan period expires, they reapply for an additional loan, and of course, pay additional fees. It's not uncommon for these people to spend tens of thousands of dollars a year just in interest fees.
Payday loan companies represent an option for those individuals with bad credit who are working on getting back on track financially. Let's face it, for one reason or another, a lot of people aren't able to have credit cards. Credit cards are the first resort of most people use when placed in an emergency position. Payday loan companies offer the "credit card alternative" to people with bad credit - an opportunity to use their money for a short period of time with repayment plus interest. For people who are responsible and realistic about their commitments, this process can be a lifesaver.