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Introduction to Payday Loans

One of the usually used tools when people are short of cash is the so called payday loans (also sometimes referred to as cash advance loans, deferred-deposit check loans, and paycheck advance or payday advance loans).

The Flaws of Payday Loans

Payday loans are known for their high interest rates, which can be from 300% to more than 1 000%. As you can see, this interest rate is far greater than the one offered by most banks on small personal loans. Even compared to credit card interest rates, payday loans beat them in negative terms.

No matter how convenient they can be in cash hardships, they have their hidden negative implications that are likely to lead you to further financial traps. It is no chance that this type of loans has been so designed that they attract usually young consumers, who lack the adequate knowledge of finances. Additionally, such loans are targeted toward clients that are already in deep debt and are desperate in finding a way to come out of it.

Payday Loans Basics

The time period for which a payday loan is requested is a short one, for example from a week to a month. The application procedure includes a proof of employment and identification. You are also required to sign a postdated check for the whole amount you need as well as the fee you will be charged. This postdated check is given to the lender of the money. No matter how reasonable the fee may seem as compared to the sum you borrow and the time period, in annual percentage terms it is much higher.

If you can really return the money after the specified time period, it may be worth taking such a loan. However, what people usually do is to extend the loan month after month and incur fee accumulation, which at the end may be significantly higher than the amount borrowed.

Imagine the following situation. You are $100 short for covering an expense so you decide to use the services of a payday lender. The latter agrees to lend you the money, but in return for a 50-dollar fee for a period of two weeks. You consider it a good option, because you are about to receive your salary soon and be able to cover the borrowed money and the fee. However, when salary time comes you are not able to pay back the borrowed money and thus incurred the $50 fee and extended the period of time after which you will return the money. It will take only a month to accumulate in fees the same amount of money you originally borrowed. So with each passing month you will pay that same amount of $100 in fees without actually paying off your debt - a vicious circle that is hard to get out of.

Payday Loans Alternatives

If you predict that you will not be able to return the money after the specific time period it is wiser and less expensive to call the local credit union and apply for a small loan. You can also ask a relative or a friend to borrow you the money in the form of a loan. Another option is to ask your employer for receiving a portion of your salary in advance. If your credit card issuer offers an advance, use it.

You can also try to ask your creditor for an extension of covering your bill. Check whether you have an overdraft protection before you write any checks to see whether the bank will cover the amount without incurring any fees.

It is always better to make a good plan that will prevent you in ending up needing payday loan. In order to do this, list the expenses and incomes you have, so that you can determine the direction of your spending and identify ways to decrease the unnecessary ones. In this way you will be able to save some money, which you can use in case of emergencies instead of the services of payday lenders.

The postdated check you leave with the lender makes you susceptible to collection practices. This means that before the date at which you have agreed to return the money the lender may deposit it, which may lead to additional fees due to check bouncing.

As it was previously mentioned, the major target group of payday loans is people in desperate financial position. As a result they end up extending their loans and incurring further fees and deepening their debt. So, if you consider the option of taking such a loan, first examine the other alternatives we offered you so that you avoid ending up paying more in fees than the amount you have borrowed.

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