If rising expenses leave you unable to cover your bills this month, you may be tempted to take out a payday loan. Payday loans are short-term loans (often lasting just a week or two) that serve as a cash advance on your next paycheck.
The way it works is that you contract with a lender who will provide you with the money you need in order to tide you over until you get paid. In exchange, you agree to pay a very high interest rate and to repay the money from your next paycheck, or roll the loan over and incur repeated fees and costs.
Payday loans can be a tempting way to get the money you need to pay your bills, but it is not quite as simple as it sounds. In addition to being an extremely expensive option (see the What it Costs section for more details on the high interest rates and/or related fees), it can also lead you down the path to deeper debt. This is because if you live paycheck to paycheck with little or nothing left over for extra expenses (which is typically the case when you need to take out such a loan in the first place), by the time you repay the loan and the related costs from your next paycheck, you may find yourself short again and be forced to take out another payday loan to try to catch up. This can become a vicious cycle that is difficult to break. In fact, one source points out that it is common for borrowers to renew a loan or take out a new one an average of 12 times or more a year.
Same Concept, Different Names
Payday loans are very readily available through a variety of lending agencies, finance companies and Internet businesses. You can do a search for these loans online or respond to advertisements offering these that are frequently played on the radio, on television, in newspapers and magazines. You may even receive offers for payday loans that come right to your home in the mail. While the avenues through which you can get payday loans can vary quite a bit, so can the names by which they are called. In addition to payday loans, they may be referred to as cash or check advance loans, post-dated check loans or deferred deposit loans. But while the names may sound different, the premise – and costs – can generally work in much the same way.