Understanding the High Cost of Payday Loans

Guest Post by Amanda Tradwick


People with lower-than-average credit scores are showered with offers for costly credit opportunities packaged to look like good deals. Here you’ll get the real explanations why payday loans are expensive ways to get credit that should only be used as last resorts.

Payday loans are always a bad deal. A payday loan works like this: You go to a lender and write them a personal check for the amount you want to borrow (let’s say $100) plus the amount the lender will charge you for the loan you desire (let’s say $20) – in this case, the check you write the lender will be for $120. The lender gives you $100 and you walk out with cash.

In two weeks, you owe the lender $120. Let’s say you don’t have the $120 in two weeks, and you need another loan. The lender will roll over the payday loan for a fee, let’s say $20 (this amount is not atypical.) Now you owe $40 on the $100 you borrowed. If you extend the loan again, the lender will roll over the loan again for yet another fee. Now you owe $60 for a $100 loan.

Too often people in very bad credit situations get taken in by this kind of offer. By the time they pay off the initial loan, they’ve paid an inordinate amount of interest on the loan.

There’s almost always a better option than a payday loan. Take advantage of times when you have fewer expenses and use these opportunities to save money for unexpected future expenses. Look for secured credit options if you need a quick infusion of cash. Ask creditors for extensions on bills instead of using expensive credit options such as payday loans to get cash. Educate yourself on the options available to those who have poor or no credit.

Instead of taking out a payday loan, consider the following options for making some cash quickly:
Go through your house and look for things you can sell on ebay
Consider hiring yourself out to neighbors or friends for cleaning, babysitting, or lawn work
Look for freelance gigs on Craig’s List and other freelance work sites
Borrow from a friend or family member

To prevent ever needing to take out a payday loan, try to prepare for the future by living within your means and saving extra cash in an accessible fund. It’s always better to scrimp now than to borrow at outrageous interest rates later.


About the author:

Amanda Tradwick is a grant researcher and writer for CollegeGrants.org. She has a Bachelor's degrees from the University of Delaware, and has recently finished research on teaching scholarships and grantsand california scholarships and grants.


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