Pass on payday loans
With the holidays approaching, a lot of people are contemplating how to get a little extra spending money for gifts and celebrations. And if you’re short on cash, you may even be tempted to stop at one of those payday loan storefronts that promise to give you an advance on your next paycheck. But beware: It’s by far the worst deal in town.
Surprise, surprise: Payday loan lenders charge extraordinary fees, often about $15 for every $100 you borrow for a period of two weeks. That works out to almost a 400% interest rate over the course of a year.
It’s true that $15 may not sound like too much, but that’s only the minimum—the fees skyrocket if you’re not able to repay the loan by the due date. A 2008 report from the Center for Responsible Lending found that the average person who takes out a payday loan ultimately pays $800 for a $300 loan. And even if you do pay it back on time, $15 isn’t chump change if you’re already living paycheck to paycheck.
If you’re so desperate for cash that a payday loan still sounds tempting, please consider an alternative, like asking friends or family for a loan. And some employers will allow you to borrow from your own paycheck, either for free or for a much smaller fee. There are almost always other options available: A 2007 Federal Reserve survey of payday loan borrowers found that more than a third said they were borrowing just because of convenience, while only 8% said it was their only option. Make sure you do your research before relying on these risky, expensive loans.