Payday Lenders

Thinking of borrowing money from one of these "instant cash" outfits? Take our advice - don't!

So you're a bit strapped for cash and thinking about turning to one of those payday lenders you see in your local strip mall. We know what you're thinking: it's only a few hundred bucks and you'll give it back after your next payday. These places are legal (at least, they are in 39 states), they're about as ubiquitous as Wal-Mart, and they take a no-questions-asked sort of attitude toward lending money. So what's the big deal?

The big deal is that a recent report from the Center of Responsible Lending (CRL) has shown that the average annual interest rate on a payday loan is a whopping 400 percent. That's the average interest rate, not just the highest rate paid. Compare that to a typical home loan (6 percent), or a student loan (8 percent) or even a less-than-reputable credit card (19 percent) and you can see why payday loans make absolutely no sense. In fact, shy of turning to your local loan shark syndicate, it's just about the dumbest place you can borrow money.

Payday loans usually work like this: you write the lender a check for the amount you are borrowing, plus a pre-determined fee. The lender holds the check until your next payday. If you don't show up with the cash on that day, the lender cashes your check.

The biggest problem with payday lenders is that they market their loans as one-time, short-term solutions to your money problems, when in fact their entire business model is based on trapping you in an endless cycle of borrowing more and more money to pay off the debts you already owe them. The CRL report showed that 90 percent of payday loans are to borrowers who use this sort of service at least five times a year, and nearly two-thirds use the service 12 or more times a year. In 2003, approximately 12 million people turned to payday lending, a full one-third of whom were homeowners who already had some equity they could have leveraged.

Alternatives to going to a payday lender

If you feel like you've hit rock bottom and need to turn to one of these lending outfits, here are a few other options you may not have considered:

  • Ask your creditors for an extension, or renegotiate your payment schedule . Most people think doing this is pointless, but you might be surprised to find that your bank, utility provider or other creditors may be willing to alter your payment scheme to keep you as a customer.
  • Ask your employer for an advance on your next paycheck . Many bosses will say yes as long as you don't make a habit of it, and the best part is you don't get charged interest.
  • Take a temporary second job . If you need $500 fast and find your weekend and evenings free, why not stop by your local recruiting or temp offices to find out if they can place you quickly into a short-term part-time job.
  • Pawn some of your belongings . Yes, we know how attached you are to your dead grandmother's Civil War figurine or your collection of Spider-Man comics from the 1980s, but cash in hand is cash in hand.
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