Still, you need to find a way to make progress. You need to reduce the amount of your payday loan debt every payday, even if it’s just by a little bit.

Something is better than nothing

Again, if you can just pay off your payday loan, do it. You’ll save a bunch of money. If you can’t, though, you need to make progress each payday.

Let’s say you owe $300 on a payday loan and that the fee for the loan is $20. That means on payday you have $320 due. You have to pay off the loan, of course, but you may not then have enough money to live on. So, you need to take out another payday loan, but this time try to take less.

Maybe you can take $250, for example. Your fee might be $17.50, but next payday you’ll only own $267.50 rather than $320. If you can reduce the amount you owe by just $50 each payday, you’ll get the whole thing paid off within about 4 months. It’s not ideal, but it’s better than paying it for a year.

A breather can help, too

So, let’s assume that you do need some of that money to live on, as in the above example. Who says you need it the same day you pay off your payday loan? You don’t. Wait a few days to take out your next payday loan. If you can wait just 4 extra days, within three or four pay cycles you’ll have an extra paycheck in there somewhere, and will have saved yourself quite a bit in fees.

This approach, when you combine it with the idea of paying at least some of your loan off each time, will help you to get your payday loan paid off quicker and save you money.

The payday loan area is no different from other areas in that there are scammers pretending to offer a real product but who are actually just trying to steal your money. Unfortunately, some people come to believe that all payday loan businesses are shady, and are part of a scam.

Of course, you need to recognize when you’re facing a scam. Any time that someone asks you to give them money before they give you a loan, you might be facing a scam. The one obvious exception is a home loan, where you have to pay closing costs and such associated with the mortgage before it’s all finalized.

Payday loans are legitimate, and in most places they are legal. Having said that, they’re also undesirable. If you can avoid taking a payday loan, you should.

Why is that, exactly? Well, payday loans charge extremely high rates of interest. The percentage you pay for a payday loan is likely to be as much as ten times or more then amount of interest you’d pay on even the highest-rate credit cards.

Another reason payday loans can be undesirable is because the term is so short. At first, this seems like an advantage. The short term means there is less interest charged, overall. The problem is that most people who take out a payday loan do so on the same loan more than once. On average, it takes three pay periods for a payday loan to be paid off, which significantly increases the amount of fees you’re going to be paying.

Yes, payday loans are legal. They’re legitimate. They’re also a measure of last resort. Before you take out a payday loan, make sure you can’t get the money anywhere else, and make sure that you absolutely can’t wait.

Photo via notsogoodphotography

Yet, some folks continue to take out payday loans, and sometimes to take them out week after week. They argue that the payday loan fee is relatively small, regardless of what the interest rate on the sheet of paper they signed says.

“So, what if the Annual Percentage Rate is 400 percent? I’m not borrowing for a year, just for 2 weeks” they say. Then, they wind up renewing the loan over and over again, sometimes for a year or more.

Let’s take a look at some of the basic math involved in a payday loan. Let’s say your lender wants to charge you $8 for each $100 you borrow. That’s not too bad, right? It’s actually very low – many payday lenders may charge as much as three times that amount. For argument’s sake, though, let’s stick with the $8 per $100 borrowed.

If you need $200 to get your car fixed, you’re going to pay the lender $16 to get you through until next payday. That doesn’t sound like a bad deal. Here’s the problem, though: chances are you didn’t budget $200 from that next paycheck to fix your car, either. So, you’ve got to cut back somewhere else (think Macaroni and Cheese for 2 weeks) or you’re going to have to renew the loan.

The majority of borrowers renew the loan for at least one more pay period. So, let’s say you do just that. Now, you’re at $32 in fees for that $200. It’s getting a little bit hefty, now. Now, you’re at or past what your bank would charge you if you’d have bounced a check.

So, come next payday, you decide that, no matter what, you’re paying part of the loan. So, you pay off $50 of it and renew the rest. Now, you’re up to $44 in fees. If you do the same thing for the next two pay periods, you will have had the loan for about 3 months and paid a total of almost $60 in fees.

The truth is that it takes most folks much longer to pay off their payday loans without renewing them, and by the time it is all said and done they’ve paid more in fees than the original loan amount. That’s just not a sound financial situation. Unless you’ve got no other recourse and it’s a matter of something that can’t wait, you should avoid taking a payday loan.

Photo via lisa_eglinton

However, there are times when payday loans are expedient and useful. Here are a few reasons that payday loans rock:

1. There’s no risk of a broken leg. While critics will compare payday lenders to loan sharks, the fact is that if you don’t pay back a payday loan no one is going to come and break your leg. They will turn you over to a collection agency, which can be annoying as hell, but they won’t break your leg.
2. It beats getting fired. Sometimes, you gotta make the hard choices. Sometimes, it’s a choice between taking out a payday loan to pay the repair bill on your car and being able to get to work. Yeah, you should explore other options, such as borrowing money from a family member or even taking the bus to work until your next payday. But, those aren’t always viable options.
3. A payday lender isn’t going to judge you. They’re used to working with folks with bad credit. They’re not going to peer down at you from across their desk and complain about how you paid your mortgage late for the past six months. They’re going to ask you how much you want, ask for proof of your income, take your check, and give you money.
4. A payday loan is a measure of last resort. You don’t ever want to get to the place where you have to take out a payday loan. But, it’s nice knowing that it’s there if you wind up needing it.
5. You can get them just about anywhere. The payday loan business has expanded greatly in the past couple of decades. There are even payday lenders who will loan you money online. Depending, of course, on the regulations in your state, you may not be able to get a payday loan at all, but if they are legal in your state chances are there’s one next to every Starbucks.

Photo via notsogoodphotography

There are times, however, when taking out a payday loan is just a bad idea. If you’re thinking about taking a payday loan and any of these conditions applies to you, think twice:

• You won’t be able to pay it back right away. The point of a payday loan is that it’s a short-term loan. If you can’t pay it back on your next payday, you have a problem. You need to be able to pay it back right away in order to keep the fees from getting out of control. Otherwise, you wind up in the trap of having to take out a payday loan over and over again, racking up all sorts of fees in the process. Within just a few weeks, chances are pretty good you’re going to have paid in fees as much as the loan was to begin with.
• You really can wait for the money. In some cases, people just get impatient. They want to buy something, and they want to buy it today. So, they take out a payday loan. This is also a bad idea. If you can afford it, and if you don’t need it to get through until payday, you don’t need it today. You’re better off waiting a week or two until you can afford it.
• You have access to other forms of credit. Whether it’s a credit card or a personal loan or your savings account, you should exhaust other resources before turning to a payday loan.
• You want to buy something on sale. The math just doesn’t work here. You’re almost always going to wind up paying more in fees than what you would have saved if you bought the sale item. Skip it for now. It’ll go on sale again.
• You need to buy food or other essentials. If you’re in that dire of a situation, there are plenty of organizations that will help. From your state agencies to charitable groups, there are plenty of folks willing to lend you a hand without charging you huge amounts of interest.

Photo via Kyle May

Unfortunately, just because there isn’t a brick and mortar payday loan store in your town doesn’t mean that there aren’t people who want and need short-term loans. So, many of these folks will turn to the Internet.

There are plenty of payday loan companies on the Internet. Today, there are a greater number of more Internet-based payday loan providers than there have ever been. Many of these businesses are legitimate, to be sure, even if their fees and interest rates are much higher than what consumer advocates think they should be.

There are also plenty of scam artists out there. There is the case of a woman in  Maryland who wound up paying nearly $1,000 to a scam artist who promised to then loan her $5,000. Needless to say, the loan never happened and the woman wound up in more dire financial straits than she was before she turned to the online payday lender.

Part of the problem is that consumers just aren’t educated enough, in some cases, to recognize a payday loan scam online. You need to understand that any legitimate online payday loan company isn’t going to ask for any money upfront. The fee that you pay for the loan will be taken out of your checking account at the same time the amount you borrowed is taken out – usually about 14 days after you take out the loan.

Ultimately, online payday loan (like most things in life) are a case of buyer beware. You need to make sure the business you’re about to work with is a legitimate business, and that they’re following the law. If you suspect that a payday lender is illegitimate, you can also report it to the Federal Trade Commission.

Photo via Don Hankins

They complain so loudly that the FTC even has a payday loan warning on their website.

So, what’s the problem? What are people worried about? Well, there are several issues that opponents of payday loans raise:

1. High interest rates. Payday loan rates typically range in the hundreds of percent when calculated as an APR (Annual Percentage Rate). Even the worst credit cards tend to max out at somewhere around 30 percent APR, and these numbers are vastly above the 10 percent or less that most consumers can get on auto loans and car loans. Opponents see these high interest rates as predatory and usurious.
2. Nefarious connections. Some opponents of payday loans suggest that these businesses are connected to the mafia or some other criminal element. For the most part, these kinds of accusations seem to be unfounded and probably more based on the idea of the mob-based loan sharks that you’ll find in the movies.
3. Racism. A disproportionate number of minorities take out payday loans. This leads some opponents to suggest that the real reason that payday loan companies are in business is to make sure that poor minorities stay poor. This kind of class warfare talk is also used to rail against pawn shops and “buy here pay here” automobile dealerships.
4. Property values. In some cases, opponents of payday lenders are really more concerned about what’s happening in their local community in terms of property values. Payday lenders often have bright and sometimes gawdy signage, for example. In many cases, property values of nearby businesses may drop when payday lenders come into town.
5. Payday loan rollovers. Many opponents of payday loans talk about how borrowers wind up taking out one payday loan after another, and thereby wind up paying fees over and over again. They suggest that a 14-day term, which is pretty standard for payday loans, is too short a term for any loan and that it almost guarantees that the borrower will have to take out at least one more loan before they can get the whole of the debt paid back.

Photo via aturkus

The idea behind a payday loan, of course, is that you pay it back within a couple of weeks. You take a loan until payday – hence, the name. In concept, that’s not a bad idea. In practice, however, it’s usually a bit stickier.

You see, when payday comes, you are indeed going to have some money. However, you’re also going to have the bills you normally have due on that payday, as well. So, you will often have to re-up on your payday loan, paying yet another fee.

The thing you need to ask yourself when taking out a payday loan, then, is how fast you can repay it. Will it take you two pay periods to have enough extra money in your budget to cover the loan? Three? Even more? If so, you should consider other options.

A credit card cash advance can be another good option, if you can’t repay the payday loan quickly. By paying your credit card off over time, you can pay less in interest.

Be careful here, though. If you only pay the minimum amount on your credit card cash advance, it can take a long time – much longer than the two or three pay periods you were planning on – to pay off the loan. If you do that, you’re going to accrue plenty of interest charges, and you’re going to wind up paying more in interest.

Another question you need to ask is what other options you might have. For example, taking a loan from a friend or family member will have significantly lower interest charges. Of course, in some cases it can lead to problems with your relationship with that person, at least if you have trouble paying the loan back.

You might be able to take out a personal loan from your bank, but the amounts of personal loans tend to be much higher than the small amounts of cash that people usually take out in a payday loan.

Ultimately, whether or not you take out a payday loan depends on your situation. In some cases, it makes good sense, but in other cases you’ve got better options to consider.

Photo via Jacob Bøtter

However, you have to think about the fees, the high interest rates and the punitive late fees. That’s one reason why many state assemblies are proposing legislation that is designed to lower the fees and cap the interest rates payday loan firms charge their customers.

If you need to obtain a payday loan and want to use it responsibly and not spend an excessive amount in fees and penalties, follow these three steps:

• Emergency use- Only use payday loans for true emergencies. If your gas bill is already late or you need gas in your car and the next check isn’t for two weeks, a payday loan might be the right choice. Resist using payday loans for a two day vacation or one hour shopping spree. Only use payday loans for essential, emergency items and situations.

• Understand the charges- Always get the fees and interest rate up front and in writing. If you can’t get it in writing, go to someone else.  Avoid any surprises.

• On time payments- Make every deadline when it comes to paying back your loan. It’s a fast route to financial disaster if you don’t. Many payday lenders charge excessive penalties and late fees when payments are missed. You want to avoid falling into this situation

If you follow these three tips, you should be able to manage your payday loan.

Photo via @joefoodie

Payday Loan Statistics

In the stores where they offer payday loans, EZcorp lends up to $1500. The average amount of the loans they make is $555. The terms are generally less than 30 days and average 18 days. The due date for loan repayments fall on their customer’s paydays.

The fee they reported that they earn is 20% of the loan amount. So, if they loaned out $500, the company would receive $100 in fees (or interest).  For the fourth quarter they reported an increase of $2.7 million in payday loan fees.

In many of their stores, EZcorp also offers longer term unsecured loans. These are usually terms of five months with ten equal installments also due on their customer’s paydays. The loan principle amounts range from $1525 to $3000 but average about $2070. With each payment, they report that they earn a 10% fee of the initial loan amount.

Auto Title Loans

At many of their stores, EZcorp also offers auto title loans. This is where you borrow money secured by the title of your car. They are 30 days loans. EZcorp reported loan principle amounts ranging from $100 to $9000 with the average loan at around $700. They earn a fee of 12.5% to 25% of the auto title loan amounts. This means that with a $1,000 loan they can receive up to $250 in fees.

Photo via nDevilTV