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Risks of a Payday Loan: What are my other options?

[Apr 21, 2009.]

 

It can be quite tempting to take out a payday loan.After all, such a loan promises you
just enough money to get by until your next paycheck lands on your desk. It can seem so easy
and convenient to apply for such a loan. It is also a quick process, so it can fulfill your need
for instant gratification.

But a payday loan can also be more trouble than you've bargained for and you may find it haunting your financial future for months, if not decades, to come.

A payday loan may also be known as a cash advance loan or a post-dated check loan. The way it works is this: an individual writes a personal check for the amount that he's looking for, plus a fee. The payday loan company then provides the customer with the amount of the check, minus the fee. If the customer opts to roll over the loan for a few more weeks, he or she ends up paying additional fees.

The company providing the loan must give you information in writing about the amounts of any finance charges and the annual percentage rate charged. In essence, a payday loan is credit offered to you at an exorbitant amount. Because of the rollover feature, you could end up paying as much as $30 in finance charges on a loan for $100.

Before taking out a payday or cash advance loan, you should explore all other financial options. For instance, you would be much better off financially if you can borrow the money from a friend or relative at a modest interest rate and pay the amount back over time. You might also be able to obtain a personal loan through a credit union at a much lower interest rate. Even if you obtain a cash advance on your credit card, the interest rate might be lower than what you would end up paying on a payday loan.

Another possibility is to ask your creditors for an extended amount of time to pay your bills. Chances are you will have to pay late charges, additional finance charges, or a higher interest rate, but, even at that, it may be the best financial route to take.

Effective budgeting may be another good way to avoid payday loans. Track your expenses for a month and see where your money is going. Stop buying things you don't need and start saving even if it means only saving $5 a month. With a savings plan in place, you may be able to avoid the on-going financial nightmare of borrowing for emergencies. In short, every little bit of money in your back account helps.

Another effective way to combat financial difficulty is to obtain overdraft protection on your checking account. This tool will help you to avoid credit problems in the future. If you still find yourself deeply in debt, consider contacting a local consumer credit counseling service. The agency may have just the advice you need to regain your financial footing.

 

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