Avoid the Payday Loan Nightmare

Payday Loan companies make it simple to borrow money and sound enticing when you are in a pinch. You can borrow money, have it in your account overnight, and never talk to a live person so it's confidential. Sound good, right...but wait. Read the fine print before electronically signing anything.

First of all there are the fees, usually $15-30 per $100 borrowed. Meaning you borrow $300, but on your next payday you pay back $390. Then if you aren't careful, they automatically roll over your loan, a fancy term for renewing the loan. They draft out the $90 fee and renew the loan for another payday cycle. Usually if you don't notify them three days in advance of the payment date that you want to pay the full balance this renewal is automatic. They are depending on you being in a financial situation that the roll-over sounds good. They do this 5 times, then start drafting some principal each time as well. It looks like this...

          Borrow                            $300

          Due date 2 weeks               90
                         4 weeks               90
                         6 weeks               90
                         8 weeks               90
                       10 weeks               90
                       12 weeks             140 (added $50 toward principal)...balance down to $250
                       14 weeks             125 (lower fee because of $50 reduction in principal)...$200
                       16 weeks             110 (again the fee is lower)...$150
                       18 weeks               95  balance down to $100
                       20 weeks               80  balance down to     50
                       22 weeks               65  balance down to  ZERO

Over the course of  5 1/2 months you have paid $675 for the original $300 you borrowed. They do include in the fine print that the finance rate is the equivalent to 900% or more if you pay the loan in full on the first due date. At the rate above, you would pay back 4X the original loan in 1 year. This is legal because it is written as fees, not interest, that you are paying.

This practice is so disgraceful that as many as 15 states have made it illegal for them to make loans in their states. I say all 50 states need to do the same. It is no different than the scams that are often pulled on the elderly. They prey on individuals that are desperate and looking for a shorterm solution to their financial worries. However, long term it creates a much bigger financial crisis as most people that are taking these loans are already living paycheck to paycheck and can't afford the repayment in the first place. Since they ACH deposit it to your account they also auto draft it from your account on the due date...leading possibly to overdraft situations where fees are $30 per occurrence, compounding the issue.

I strongly urge anyone considering one of these loans to definitely look at all other options first. This is not the way you want to go. I also strongly urge all state governments to make this practice of business illegal to protect their citizens from this type of unfair practice. If it were not available in the first place I would not have found out the hard way just how hard it is to get free from their grip.