It's Friday, you don't get paid until Monday, and you need cash to get through the weekend. Then you spot a place with bright lights spelling out "Get Cash Here!" Easy, right? You go in, write a check, and walk out with money in hand.
Hold on a second, let's look at what's really going on here.
The payday lending business has exploded in recent years, but they’re not out to help you. They’re out to make a lot of money, and you're a target.
You’d pay $520 in interest…. and STILL OWE the $480 you borrowed! Ouch.
what's a payday loan?
When you visit a payday lender for a loan (also called a cash advance or delayed deposit loan) you write a check dated for your next payday, for example. If a lender cashed the check right then, it would bounce. So you and the lender agree that they'll wait to cash it until later. The lender slaps a fee on the transaction, which is included in that check you write.
Sure, you might think, a fee to borrow money seems okay, so what's the big deal? The problem is that when you look at the fee as an annual percentage rate (APR), it's ginormous. The APR is what you pay – on top of the amount you borrowed – for the privilege of getting a loan.
that’s right… ginormous
Most payday lenders charge a fee per $100 borrowed. Let’s say you’re a little broke, and need $400 to pay your rent. The payday lender you visited charges $20 per $100 borrowed. You’ll write a check for $480 (20 x 4 = 80) and date it for two weeks from now, because by then, you’ll have gotten paid. You just paid an APR of 520%. That’s huge. Especially because you’d pay 22%-30% APR for a credit card cash advance.
roll over fido
The payday lenders have got you covered there, too. You just pay another large fee and renew – or roll over – the loan. So, let’s say you kept rolling that $480 two-week loan over for a whole year (another 25 two-week periods). You’d pay $520 in interest…. and STILL OWE the original $480 you borrowed! Ouch.