Thinking About a Payday Loan?
6 Reasons to Think Again

Payday loans are fast and easy, giving quick cash to people with poor or bad credit, without a lot of questions. Often, all you need to qualify is proof of a steady income (like a pay stub), a state-issued driver’s license or ID card, and a checking account.

But think twice, three times, or more before taking out one of these “quick and easy” loans. They are an expensive way to borrow money, and can trap you in endless debt. Here are six things you need to know:

1. You could be just as broke when the loan is due.

Before agreeing to a payday loan, ask yourself where the money will come from to repay it. These loans usually have to be paid back one or two weeks after you borrow the money. If you are already living paycheck to paycheck and don’t expect a sudden windfall (like a tax refund or an overtime check), it can be hard to come up with the money on the due date.

2. Filling out an online form could be a mistake.

There are reputable loan companies providing payday loans. There are also dishonest operators trying to scam borrowers who are desperate to get quick cash. According to the Federal Trade Commission, filling out an online form lets a scam site record your keystrokes, even if you never submit it. They use those details to sell you unwanted items, charge you for things you didn’t order, or steal your identity.

3. You might get more attention than you want.

Often, ads for online payday loans aren’t from actual lenders, they’re from “lead generator “companies – they don’t lend money, they sell your application details as sales leads to payday loan companies. The loan companies then call you with an “approved” loan offer, and can be relentless.

For example, one financial reporter applied for a $500 online payday loan with a false name and address, plus phony Social Security, bank routing and bank account numbers. However, she used her real telephone number. Within minutes the reporter received phone calls with loan offers, and she got dozens of similar calls over the next few months.

4. Costs can add up quickly.

If you can’t pay the full amount when it’s due (usually in a week or two) the lender “rolls over” the loan – a new loan (with new fees) is taken out to pay off the old loan. In some cases, the new loan just covers the finance fees on the old loan, and you now have two amounts due. Then three. Then four.

If the lender automatically takes payments out of your bank account, those payments may bounce or make your other checks bounce.

This results in bank overdraft fees, plus more finance charges by the lending company. Most borrowers don’t realize it, but in six months to a year, a quick $200 loan can turn into a debt of $2,000 to $3,000 or more.

5. The details may bite you.

Some lenders automatically extend payday loans on each due date, charging just the finance fee; you have to notify them in advance to take the entire amount due from your account. If you don’t do that, only a small percentage (or none) of each payment will be applied to the balance due – it just covers fees and interest payments. This traps you in an endless cycle, where payments are automatically taken out of your checking account, but the balance owed never goes down.

Other companies charge a fee just for looking at your application, and will automatically deduct that money out of your checking account even if you decide not to get the payday loan.

6. Sometimes, they lie.

Even if the paperwork is boring and you’re in a hurry, don’t trust a company official telling you how the loan will work. The Federal Trade Commission warns that some lenders lie about how much their loans actually cost. Read the details yourself, and ask questions.

Pay attention to exactly how and when the loan must be paid back; ask for a written explanation of all the fees, including the annual percentage rate and possible finance charges; and make sure you understand all other terms of the loan. Most importantly, understand what will happen if you can’t pay the full amount when it is due.

--

If you still think a payday loan is your best choice, do your homework. It could save you from getting caught by dishonest lenders or scam artists.

Look for claims from consumers on sites like this one, and check for complaints with the Better Business Bureau. Ask your state or local Consumer Affairs Department which agency handles loan companies, then get details about the laws that payday loan companies have to follow in your state.

Overall, the best choice is to stay away from payday loans. Most experts recommend avoiding payday loans by finding other ways to raise quick cash.

• Tips for resolving other complaints:
• How to Escape the Payday Loan Trap: 2 Things You Can Do Right Now
• How to Head Off Problems with Roofing Contractors Before They Occur
• Before You Hire an Architect: Tips for Interviews and Contracts
• Buying or selling a home? Read these insider tips first.