There it is again, another payday loan business opening up down the street, and another one a few blocks down. It seems like the payday loan business is booming. The proliferation of these businesses indicates a problem in our society that bears looking at. Payday loans are a last resort option for the financially strapped. But for many, what should never be resorted to except for in an extreme emergency becomes a trap as re-loan after re-loan eats every last penny they have.
The Bait
The trap is usually sprung on unsuspecting victims when they are at their lowest point. An emergency brings them to the doors of the payday loan business. The bait is tempting. For a small charge, typically $7.50 for every 50 dollars, you can get a pay check advance loan. All you need to do is write out a check for the amount of the loan plus the charge, leave it with the payday loan company and you can have the money you need/want a whole two weeks before your paycheck comes in.
The Trigger
The catch to the payday loan trap is found in the situation that brings people to get the loan in the first place. Two weeks is just not enough time for many to get out of the financial emergency that made them get the loan. So when two weeks are up and they are obliged to buy their check back, they find they are faced with a couple of options:Pay the interest only and extend the loan for another two weeks. Visit another payday loan Company and repeat the process.
Both of the above options are variations on the same trap as until they get the money to pay off the entire loan(s), they end up paying more and more on the original amount. Take a look at the numbers after a year of re-loaning:An original loan of $500 costs $75 if paid in the first loan period The total interest payment for the year would be around $1950 Add in the original amount of the loan ($500) and you have a grand total of $2450 This is essentially an APR of 390%
A payday loan only gives a two week cushion to the borrower, but for many it is a false sense of security. Unless you are 100% sure you can pay off the loan in two weeks you should avoid this type of loan at all costs.
Disarming The Trap
Like I said, most people who resort to a payday loan are in trouble financially. But the amounts they get loans for are typically small. Before turning to this type of loan you should exhaust all other means of paying the expense. Often there are friends or family that could help. Asking for an advance at work could also be an option.
The best way to disarm this trap is to avoid it in the first place. If you aren't in the trap, resolve now to save up a little every paycheck for emergencies. Pay down your debts that you owe and live within your means. Always remember that there is no substitution for preparation.
