They are all over the place, whether at the places we shop or on billboards or even advertising on TV. Their advertisements are bright, fun and feature happy people. They promise no credit check and instant cash, and they portray themselves as a savior for people who need money now. They go by many names, including payday loans, cash advance or car title loans. Their ease of lending money is matched only by their high interest rates, and much like a drug, people find themselves in more and more trouble when using payday loans. They can quickly turn into a vicious cycle, offering little hope of escaping.

What are they?

They are essentially businesses that lend money to ‘riskier’ borrowers. Typical lenders, like a bank or a credit card company, won’t just lend money to anybody; you have to have a certain credit score, might have to have some collateral, or even may have to have a specific reason to borrow money. Not everybody will qualify for a loan from a more legitimate lending institution. When a borrower has been turned away by everybody else, payday loan type lenders will say ‘yes’ and give them a loan. Unfortunately, this loan comes with a large interest rate, sometimes as high as 15%. Yikes.

How do they work?

Although they can vary from place to place, these loans are normally written to be short loans, to carry you over to the next paycheck, aka payday loans. A borrower will walk in and apply for a loan. Often times very little information is gathered and some don’t even perform a credit check. You’ll get a check/cash/prepaid debit card with your money, and be expected to repay it in two weeks. The sad part is that most people aren’t able to pay it off when their loan comes due, and are forced to roll it over, thereby racking up more interest rate charges.

Why are they so bad?

That 15% fee might not seem too terrible, especially if you’re only borrowing $100 or so. Unfortunately, when you do the math, this can translate to an annual percentage rate of 390%. To compare that, most credit cards, even the higher ones, might only charge an annual percentage rate of 25%. Additionally, the number of people that get just one payday loan is small. For a lot of people, one loan turns into two, and two turns into three. Talk about kicking people when they are down.

Why are you telling me about this?

Well, if G.I. Joe taught us anything, it’s that “knowing is half the battle.” I honestly hope that none of my readers ever find themselves in a situation where they’d need a payday loan. If you do, please know that there are so many other options. With a good budget and a little planning, we should learn to be able to make do with what we’ve got. Heck, ramen only costs what, ten cents? Or maybe somebody you know will find themselves in need of such services and you’ll be able to advise them against it. Regardless, I hope you now are aware of the dangers of payday loans!

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