Payday Loans

You have seen them on the corner and in the poorer parts of town with names like "Quick Cash", "Quick Loan", "Payday Loans",and "Car Title Loans". They are starting to sprout up all over the country and will soon rival Starbucks for sheer number of locations.

They are the new trend in predatory lending practices but still manage to fly under the radar of regulation in most states. They don' t charge interest, they charge a "fee".

But it sounds like the ultimate in convenience. Need some quick cash - stop by and in just five minutes you can be out the door with $100, $500 even $1000 dollars. But what is the true cost of this "convenience"?

How It Works

Payday Loans generally require borrowers to give them a postdated check for the amount of the loan, plus a fee. Once the loan is due, the borrower can either allow the check to be cashed or "roll" the loan over - essentially getting a new loan.

Critics give this example of how fees can add up for payday loans:

Sombody who makes $12 an hour borrows $500, getting charged $80 in fees.

A week later is payday. But the borrower can't afford $580 out of his $750 paycheck.

So he takes out another $500 loan and pays the $80 fee. The next paycheck he still can't afford to repay the loan, so the process repeats.

By the second time the loan is rolled over - three weeks after the initial loan - the borrower has paid $160 in fees, still owes the original $500 principal and owes another $80 in fees.

Maybe you should be loaning your money to them rather than borrowing from them.

What To Watch Out For

Early repayment fees. Pay off your payday loan early and they sock you with another fee.

Late repayment fees. You may have to pay the entire fee again if you miss the payment date.

"Membership" fees. Some companies charge you to become their customer along with charging you as their customer.

Giving lenders access to directly debit your bank account. Just hand them your wallet, it's quicker.

Fine print (as in all contracts). Know what you are signing or don't sign it.

Bounced check or debit fees. Make sure you have money in your bank account or you get to pay your bank a fee as well.

"Collateral" requirements such as a car title. Miss your payment and you may be missing your car - permanently.

Payday Loans Industry Representatives say that their short-term lending is less costly than overdraft or late payment fees and penalties.

On $100 needed to pay a bill, for example, a consumer could pay:

$15 for a payday loan fee

At least $50 for a bounced check, including merchant and bank fees

At least $35 for a late credit card payment fee

At least $45 for late and reconnection fees for a utility bill

There Is A Better Way

The root problem here could be that you are getting strangled by your debt payments. Credit cards, store accounts, installment payments and such can eat up your income quickly. It may be time to create a debt reduction plan for yourself. Consolidate your debt and save money with a home equity loan.

Or it could be that you are just spending more than you make. You may need to spend a few minutes each week and write down your expenses. Then categorize and total them to see where your money is going. Then record your income for the same time period and make sure that you are not spending more than you make.

Sure, everyone gets behind occasionally. But you need enough room in your budget (this means spending less than what you make) to accommodate the "budget busters" and surprise expenses that may come up. It may mean cutting back on cable, magazine subscriptions or eating out. But last time I checked, McDonalds did not charge a $15 "fee" for making your food.