We’ve all been there. It’s the middle of the month and you’re two or three weeks from your next paycheck. You’re driving to work as usual when a dashboard light starts flashing. The engine starts making noise. You don’t know what it means exactly, but you know it won’t be cheap. It’s weeks until payday, and you don’t have the money you need right now.
Ideally, you’ll have an emergency fund, a credit line or a HELOC you can use for those sudden, unexpected crises. Sometimes, though, you don’t have the best tools available.
If you’ve seen ads on TV for quick cash services, you probably thought they were too good to be true. They are. Most often, these are “payday loans.” This is a short-term loan against your next paycheck. It’s a really bad deal.
You write a personal check to the lender for the amount you want to borrow plus the lending fee. The lender holds the check until your next payday. At that point, they either cash the check or extend the loan for a longer period of time. Those extensions usually cost the same as the fee. They charge a new financing fee on the loan, and then you’re responsible for the whole amount. This fee adds up quickly, which can turn your one-time emergency into a crippling debt crisis.
The fees are usually the highest that is allowed by law. A whopping $15 charge per $50 loaned is not uncommon. In a hypothetical scenario, if you borrowed $100, you’d have to write a check for $130. If you need an extension, you’d have to pay a new fee – $45 for the new loan. You’d now owe $175. If this pattern continues, you can be in serious financial trouble very quickly.
If you miss a payment on one of these loans, you can be in for terrible consequences. For starters, your credit score will suffer. The terms of repayment can also allow the lender to garnish your wages, seize your car, harass you at home or work, or even take you to court. The contract you sign with a payday loan provider has all kinds of terrible traps that are hidden in the fine print.
These costs are why most people who use payday loans use them only as a last resort. What else can be done if you really need cash right now? The institutions making these loans are counting on that desperation to make their profits.