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by Ziggydoom on April 3rd, 2005

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What are payday loans? Are they a good type of loan?

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  • by Merry Walker on April 3rd, 2005

    Merry Walker

    A payday loan is generally a short-term high interest unsecured loan. You show your pay stubs to the lender, they loan you money. Generally they have you write them a check that is either post-dated to your payday or will be held until your payday. The charges, fees, and interest rates are generally pretty darn high.

    They're a bad idea because the fees, charges and interest are so high. If you were short this payday, you're going to be even shorter next payday after paying it back. More, if payday loans are your only source of emergency funds, you need to look at your finances very carefully, as you're either overextended on your bills or have no funds set aside for emergencies. Or maybe both.

    Bob Martin: I answered the question, which specifically asks for opinions. This is the eighth bad rating you've given me on the same day, citing only the most specious reasons. Apparently you're more interested in slamming me than in giving honest ratings. I suspect the "Bob Martin" account was created specifically so you could give me bad ratings without risking this same kind of retaliation to your primary answerbag identity (and I have a pretty good idea what that is). However, I participate in answerbag as it is meant to be used, and don't engage in petty personal attacks.

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  • by Andy Is Wicked Married to Penal Colony on April 3rd, 2005

    Andy Is Wicked Married to Penal Colony

    The bottom line: You should avoid these loans. If you can't, here's what you need to know about them. This is a Canadian article, but it still applies to most other places. . .

    From: http://www.bankrate.com/brm/news/loan/20040630a1can.asp

    or search http://www.bankrate.com using the term "payday loan"--they have lots of info. on these loans. . .

    High fees and high interest rates (that usually compounds at a staggering pace) is the short answer. Read on for the detailed answer:

    How they work
    Payday loans are only for people who are gainfully employed and can prove they have steady pay cheques. "People ask for a certain amount, usually in the neighbourhood of $100 to $500 for two weeks to a month," explains Fran Smith, executive director of the Credit Counselling Service. "The plan is to tide you over till you get paid. Then you go in and pay off the loan."

    Besides your name and contact information, as well as the name and address of your employer, don't be surprised if they ask for your Social Insurance Number (Social Security # in the U.S.), the names and phone numbers of family and friends or other references and possibly your landlord. They may also ask for bank statements and particulars of other loans and debts. The approval process is short; often borrowers have cash in hand in less than half an hour.

    For example, you take out a loan of $100. You give the lender a post-dated cheque for that amount plus a processing fee, usually in the neighbourhood of $15 (or more). The cheque is usually dated for one, two or four weeks later.

    On that date, you have a couple of choices: Let the loan company cash the cheque or roll over the debt. "Roll-over means you take the loan out for another two weeks for additional charges," explains Smith. You pay only the processing fee and the interest accrued up to that point. You have until your next payday to clear the $100 principal.

    You can also pay off the original loan and then take out a new loan. "We often see people go to another payday loan company and take out a loan to pay off the first." If you don't pay the loan off when it comes due, this is where the trouble starts. "It becomes an ongoing cycle of borrowing money. You end up robbing Peter to pay Paul."

    That's why Smith says you have to be diligent if you take a payday loan. "You have to ask, 'What am I going to have to pay, what are the fees?' I've heard of administration fees being $100 on a $300 loan," he says.

    Why they are a bad idea

    "In most cases, people are using them because they don't have any savings or any kind of an emergency fund," says Smith. And they get caught up in a cycle of debt.

    "On top of high interest rates, there are late fees, processing fees and charges for non-sufficient funds," says Eisner. "We know of consumers calling these companies and saying 'I need you to hold my cheque, don't cash it' and most companies process it anyway, knowing the funds aren't there."

    If your credit rating is holding you back from getting a conventional loan, taking out and repaying payday loans will not help you in the long run. "These debts aren't reported to the credit bureaus," says Smith, so they will not bolster your credit rating to make you more attractive to a bank, which offers cheaper products.

    "If you have no savings and you can't pay the loan with your current pay cheque, you're not going to be able to pay it out of your next pay cheque either," says Smith.

    Better, cheaper alternatives
    Before opting for a payday loan, make sure you've exhausted all other possibilities. You've probably asked friends and family to tide you over, but have you contacted your creditors?

    If the reason you need $100 is to pay your phone or cable company, call them and tell them you are having financial trouble. They have the authority to give you some time to pay it off or arrange a smaller payment, and their late fees and interest rates are better than any payday loan you could find.

    Some employers will also advance you money on your pay cheque. You may be better off asking your boss than turning to one of these lenders.

    Your other option is to find a local, nonprofit credit counselling service. They may be able to work out a repayment plan for you. "We do it all the time," says Eisner. "It's a short-term fix, it's not a debt management program -- that's a bigger program. For something this small, say $1,000, we may be able to make an arrangement with your creditors."

    No matter how far in debt you are, this is an option for you. "We don't refuse anyone service," he says.

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  • by CruzControl on April 7th, 2005

    CruzControl

    The trouble with payday loans is that you get caught in a cycle. You repay the loan on payday, then immediately have to take out another loan to get through to the next payday. I would recommend another way to get the money you need. If you have time, maybe you can take a temporary job.

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  • by Davids Girl on August 4th, 2008

    Davids Girl

    I know from experience pay day loans can be trouble. You get the loan, pay day rolls around, you pay back the loan. Now your paycheck is gone because you just paid off your payday loan. People were right, it can be a vicious cycle. Sucks to be broke though. Way to much month left at the end of the money!!!

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  • by callmecasanova on August 8th, 2009

    callmecasanova

    its basically a pay advance with interest.. bad idea..you'll just place your self another week behind

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  • by GLAM71 on December 8th, 2008

    GLAM71

    cash advance until pay day. you pay a high interest rate but you get the money quickly and hassle free. these loans are a horrible idea because once you do it once you get caught in a cycle of doing it all the time. you will become a frequent customer and always owe the lender. they should be called pay day owns, because they own you until you break the loan cycle. by the way can i borrow twenty dollars.

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  • by St. Thomas on February 4th, 2009

    St. Thomas

    Evil and Stupid. They are a bad type of Hi-interest loan that are border line legal in most places.

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  • by alexferguson on February 18th, 2009

    alexferguson

    Payday loan is a short term loan which you receive pending on repayment when you receive your next paycheck.Payday loan is very easy to maintain as long as you have a checking account and an identification
    Payday loans are quite popular over the last few years as a way for people to pay bills that come unexpectedly.One of the main reasons of payday loans to become a big business are their ease to obtain.Although the interest rates are quite high,this has a way of being turned off.

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  • by SannyFairy on March 24th, 2011

    SannyFairy

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