By David Pilley on August 16, 2010
.jpg.aspx?width=75&height=75) Sometimes you might be in a situation where you need extra cash before your next paycheck. What should you do? Well, if you’re getting that paycheck in the next 24 hours, you can probably wait. However, if it’s a couple of weeks away, you’ll probably want to take action. One helpful, albeit risky, option is to apply for a payday loan.
A payday loan is a small, short-term loan that can cover your expenses until your next paycheck. It is small (usually ranging between $100 and $1,000), and it covers a short term (often two weeks). Payday loans are often supplied by third parties, or someone other than your credit card companies. You can either walk into a lending store and apply for a payday loan in person, or you can apply for one online. You will be asked to give personal information, such as your Social Security number, bank account numbers, and employer information. You will also need to supply a recent pay stub and a recent bank statement so you are not charged with fraud. Once you fill out all the paperwork and give your supplementary information to the lender, you will then get your loan. If you are applying online, the loan is direct-deposited into your account. Once you receive the payday loan, you will then have to pay it back when you receive your next paycheck.
Remember, it’s a loan, meaning there is interest tacked on. You will have to pay back more than the amount you purchased. The main reason many economists advise against receiving a payday loan is because of the extremely high interest rates. Most payday loans have a 15% to 30% interest rate, and the loans last for only two weeks. If this rate is extrapolated into an APR (annual percentage rate), it is a 390% to 780% rate! To dissuade you from getting a payday loan, I’ll give another example. A $100 payday loan lasting eight days with an 18% interest rate has an APR of 821%! That is a whopping amount of interest.
Interestingly enough, regulation of lending institutions is not done on a federal level, but on a state level. Most states have set usury laws, meaning interest rates cannot exceed a certain APR. Payday lenders can often get around the usury laws simply by calling their interest rates “service fees.” Many states also have usury exemptions for lenders outside the borrower’s state. Therefore, a lender in one state (like South Dakota, where there is no APR limit) can make a loan to someone in a different state (like California, where there is a limit) with an interest rate exceeding the allowed limit. Because of these loopholes, a few states have banned payday loans altogether.
Ultimately it’s your choice whether you want to purchase a payday loan or not. Just remember that the interest rate will be much higher than a typical loan, and if you have insufficient funds to pay back the loan, your credit score will plummet.
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