Fast Loans from Payday Lenders Can Result Cycle of Borrowing

[Jul 27, 2009.]

 

People who need fast loans often turn to payday lenders. But borrowing money this way can often lead borrowers into a cycle of repeatedly using payday loans. About 75% of people who get payday loans end up re-borrowing money before their next pay period to make ends meet, according to the Center for Responsible Lending.

Quick Loans Lead to Slow Payoffs

Of those who repeatedly take out payday loans, 49% take out a new loan within one day of paying off the old loan, the study found. Because borrowers may become trapped in a cyle of re-borrowing payday loans, not only do they end up paying huge amounts of interest, but they may continue juggling loan payments and their monthly bills for an extended period of time.

Borrowers should avoid getting payday loans if they have other sources of funds. But for people who truly see this route to quick loans as their only alternative, here are some things to remember.

Payday Loans Have Hefty Fees

Payday lenders charge big bucks for the priviledge of borrowing money. Payday lenders in over 30 states can legally charge interest rates in the triple digits, and it's not uncommon to pay around $60 to borrow $350. Consumer advocates are pushing to have the interest rate capped at 36%. The study found that these high costs often result in low-income borrowers having a tough time stretching their dollars so they turn around and re-borrow money.

Avoid Online Payday Lenders

While it may seem convenient to borrow money through an online payday lender, there are some risks with doing so. They include:

—The possibility of identity theft

—The lender may attempt to skirt following state laws by running operations online

—The lender may not even be based in the U.S.

A Borrower's Check Could Bounce

A payday lender will make a loan due in full on a borrower's payday. The borrower post-dates a check with the payment amount  or authorizes an electronic withdrawal. A person who doesn't have enough money in his or her checking account on the due date runs the risk of bouncing the check, which will resort in penalty fees from their bank and the lender.

Alternatives to Payday Loans

Quick loans from payday lenders may not be the best solution for cash-strapped borrowers. People who are having trouble paying their bills should contact their creditors to discuss reduced payment plans and other options. Another alternative is to find a reputable credit counselor who can help set up a budget and debt reduction plan.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.