Keep this pattern up and you’ll find yourself in big trouble. Those fees may not seem like much, but they add up and they add up fast.

Let’s say, for example, that you find a payday lender with relatively low rates. They might charge you $8 per $100 borrowed. Maybe you needed $225 to get your car fixed. The payday lender only gives loans in $100 amounts, so you borrow $300 and write a check for $324. You plan on taking the extra loan amount and setting it aside.

Well, of course, it doesn’t always work that way. It might be that you had another emergency crop up, or that you just decided to take that extra money and buy your girlfriend a nice dinner at that sushi place downtown.

Hope it was worth it, because now you’re hosed. Come payday, you may not have enough to cover the payday loan. Sure, you’ve got $80 that you can put toward it, but remember that the lender doesn’t loan amounts less than $100. So, you borrow $300 again, at another cost of $324.

One thing leads to another, and two weeks later you’re no better off. In fact, you decided to take in a concert, and wound up blowing $150 unplanned between your tickets and a couple of T-shirts.

Come payday, you don’t even have the $324. So, you take out a $400 loan, at a cost of $432 this time. Now you’ve paid a total of $80 in fees, in just a month and a half, and you’re no further ahead.

Avoiding this kind of payday loan mess isn’t always easy. Sometimes, it means borrowing less than you need. If your car repairs are $225, borrow $200 from the payday lender and get the other $25 from a friend or family member. Buckle down in between, so that you really can pay off your payday loan.

Photo via Steve Snodgrass

The setup
Let’s say you live in a very rural area. Public transport is not an option. The only bus you see on a daily basis is the school bus. You truly live in the sticks.

You also live twenty miles from work. Walking and riding a bike to or from work is not an option as you have bad knees. You moved away from family many years ago. Due to your location, car-pooling is not an option. Again, you are at the mercy of your own devices.

The problems arises
One day you are coming home from work and your engine stalls. You get out and look everything over, but you can’t find anything wrong. Therefore, you call a tow truck to come pull your car to the repair shop. This tow bill has now cost you the last dime in your bank account. Good thing this situation happened on Friday.

Saturday rolls around and you receive a phone call. The prognosis on your car is not well. Your water pump has gone and needs replacement. Your car is now completely un-drivable. You need your car to get to and from your job.

The service tech tells you that it will run you $150 for parts and labor. You just wrote the last bit of money you had to the tow truck company. The auto repair shop does not know you so they will not take a post-dated check.

The financial setup
With the last of your money gone and nobody to turn to you decide to hit up the payday loan place for a quick bit of cash. This costs you $35 to do. This is better than bouncing a check and paying $70 in fines from the bank and auto repair shop.

With your money in hand, you go and get your beloved car from the shop. Everything works great and you are good to go for another week. You mark down that you have a week to pay the money back. This is no problem as you payday happens in two days.

The repayment
Payday has finally arrived. You are now able to restock your groceries and eat. Even better, you can go and repay that payday loan you took out to fix your car. You walk in with a smile and pay off the payday loan people. The world is right once again.

The moral
While getting a payday loan should be one of the last things you do, there are desperate times that you have to bite the bullet and snag a payday loan. This story is a bit overblown, but the point is that you paid off the loan as soon as possible. It cost you $35 for the payday loan versus the $70 in bounced checks. If you had not paid the loan off on time, the amount for the payday loan would have sky rocketed. If you get a payday loan, you must pay it off within the allotted period.

Photo via Fuyoh!

Consumer advocates in many places around the country have raised concerns about the high interest rates on payday loans. They argue that these rates take advantage of customers when they’re in a desperate situation. Consumers don’t always agree, however, and are often willing to pay those fees for the sake of expediency or of convenience.

What complicates the matter, at least in part, is the fact that these loans are so short term. While the Annual Percentage Rate for a given payday loan may be in the triple digits, the actual fee associated with the loan may be a small amount – often $50 or less on a loan of several hundred dollars.

In Ohio, the issue of payday loans has made it once again to the legislature. The state of Ohio passed legislation recently that caps the interest rate on payday loans at 28 percent. This may fundamentally change the way that payday lenders operate in the state of Ohio, and may have a real impact on that particular market.

One report, released by the group Policy Maters Ohio, suggests that Ohio residents are still paying the high interest rates. In addition, Ohio’s recent legislation allows borrowers at least a minimum of 30 days to pay back loans, but many of these lenders were still requiring that the loans be paid back within two weeks or less. These lenders have found ways to circumvent the new law, or are operating outside the boundaries of the law.

Advocates in other states such as Illinois have also been pressing officials to cap rates on payday loans in those states, as well. Illinois passed legislation several years ago that set out to deal with the issue of payday loans. The 2005 Payday Loan Reform Act applied to shorter term loans. In response, payday loan lenders have created longer-term loans with the same triple digit high interest rates.

Illinois in considering new legislation to address this issue. The current legislation would lower the cost of borrowing, help to ensure that consumers don’t over borrow, and prevent them from using one payday loan to pay off another.

Advocates in Illinois and Ohio, as well as other states looking at the question of payday loans, are suggesting that state laws be changed to require a minimum of 90 days to pay back a loan, and that loan rates can then be uniformly regulated.

Myth: The thousands of people who take payday loans are degenerates who know what they are getting themselves into. They use it to make up for bad financial planning and of-the-moment purchases.

The reality is that most people who borrow from the payday industry are normal people. They work 9-5, have kids and live a normal lifestyle. That is until they are sucked into the debt trap lifestyle spawned by accepting their first payday loan.

Sandra Harris

“At the time it seems like the way out, but this is not a quick fix. It’s like a ton of bricks.”

A respected member of her community in Wilmington, NC, Sandra and her husband were always months ahead of the bills. Her husband then lost his job and she was left with the responsibility of not letting everything go to shambles in the midst of unemployment.

Her debt trap began with an initial $200 payday loan and she continued to renew it because she needed to pay off more pertinent bills like health care, utilities and food. The decision was not entirely hers, she felt heavily encouraged to simply renew the initial loan from the payday representative.

As the weeks dragged on, Sandra continued to renew and ended up taking larger loans. When the boiling point hit her, Sandra realized the only way to pay back the original loan was to take another from a new payday lender. As a result, she was forced to pay over $600 a month in loan fees which resulted in her family being evicted from their apartment and car repossessed. Her road to recovery started with contacted a debt consultant agency and working everyday to pay off her debts.

Lisa Engelkins

“I spent over $1200 in fees for a $255 ‘revolving’ cash loan,” she said. “I was throwing away $90 in fees every month just to use the same $255 cash payday loan. And, worst of all, I had no idea how this trap worked until I was out from under it.”

Being single mom is tough enough and you are always looking at ways to make the ends meet. Lisa was convinced payday loans were a good way to try to pay down her expenses when she saw a run of commercials on the TV. She quickly found an Urgent Money Service store close to her home and borrowed a $60 loan. The size of loan grew into a $300 loan and then she got caught in debt trap. Before she could seek help, Lisa had paid over $1200 for a $300 loan.

Lucky for her, she realized the predatory nature of the industry. She found help, let the check bounce, and managed to pay back all she owed within a few years.

Anita Monti

“I felt like I was in a stranglehold each payday. After awhile, I thought, ‘I’m never going to get off this merry-go-round.’ I wish I’d never gotten these loans.”

For a while, Anita Montit’s routine went as follows every two weeks: Pick up her paycheck at her computer technician job and go to an Advance America and then Check ‘n Go, where the first loan pays for the fee for the second loan. She spend over $100 in loan fees every two weeks just to keep borrowing more.

Anita fell into debt trap from wanting to spend a little more on Christmas presents for her relatives. She figured payday loans were harmless and she could pay them back in no time. However, the encouragement from representatives to merely renew the loan kept her borrowing every two weeks instead of paying off the entire loan.

Stephanie Singleton

Ms. Singleton didn’t think twice when she was recommended to renew her first loan instead of pay it off completely. After all, taking care of the health of her kids and vital bills were far more important, right?

Stephanie worked in hospital administration and had no problem paying all the bills and taking care of her family. She took out her first payday loan because it seemed harmless and the extra money could help tie up some financial loose ends. Like the other victims, Stephanie began to only pay the renewal fees and within a few months she was paying over $800 in fees to keep the loans alive. She lived in fear of entering a lawsuit because of a bounced check and the payday locations would not negotiate one bit with her situation.

She required the help of friends and family to afford an attorney that helped her with a payment plan to get out of debt.

–

There are also individuals who have been targeted by fraudulent companies who are illegally based in certain states and operate online. Tim is one such victim:

My name is Tim and we live in Little Rock. We were running behind with a few bills and my parents who are on a fixed income needed some financial help. I really didn’t know where or who to turn to for help so I applied and received a $300 payday loan over the internet. My intention was to pay it off on my next payday but instead only the fee of $90 was drafted from my account. By the middle of September I had paid them back $450 in fees alone.

Our finances were getting very tight as we had accumulated numerous medical bills. So I contacted the lender to see if an arrangement could be made to either reduce the amount I owed or even declare the loan paid in full since I had already paid them back more than I had borrowed. But they refused to work out any kind of an arrangement with me. I had enough by then and I was not going to allow them to have access to my checking account. So I closed my bank account and opened a new one. This was very hard to do because we have had that account for almost 20 years, but it was the only thing I could do to prevent them from taking more of our money.

Shortly after I closed my account, I filed a complaint with the Arkansas Attorney General’s Office. They were very helpful and encouraging. They attempted to contact this lender and as of today the lender has not responded to the AG’s inquiry. I also did some research on this “lender” and found out that they are a part of a much bigger operation. I believe that they are headquartered in the Bahamas. They did have a mailing address somewhere in Utah but after tracking that down and speaking with a banking official in Utah, I learned that it was just a mail box for receiving mail and that they were not licensed in the state of Utah, let alone the state of Arkansas.

Now after a few months have passed, I’ve started receiving e-mails from them offering me a one-time settlement of 70% of the balance they say I owe of $495 and that they are there to “help” me. But for a one time offer, I seem to receive that e-mail about two to three times a week. It’s almost comical. But now I’m starting to receive phone calls at work. I do have caller ID so I don’t answer any number I don’t recognize, so I just let it roll over to my voice mail. That was okay for the first time, but now they are calling our receptionist to get through to me.

On two occasions I notified them that I was not to be contacted by either e-mail or phone at my place of business and each time they have ignored my warning. I told them in my last e-mail that they would not receive another payment from me. Then just this morning I received another e-mail from them at work (after I told them not to contact me). This time they were offering me a payoff of two payments of $170 due on 12-1 and 12-15 and the only payment method is Visa or MasterCard debit/credit card. These people must think I’m stupid to give them that information let alone pay them a total of $340 on a $300 loan of which I have already paid them $450!

According to the Attorney General’s office, the loan is illegal and in violation of Arkansas law. They also told me that it is highly unlikely that they will attempt any kind of legal action against me. These “businesses” are sharks that prey on people in their times of need and need to be shut down. I never should have tried to get a payday loan especially one over the internet in the first place. I encourage everyone who reads this to never under ANY circumstance take out a loan from any Payday lender, especially one over the internet.