What are Payday Loans? Should you Use Them?

Payday Loans are blasted throughout the personal finance world, to be avoided at all costs, but what exactly is a payday loan?

What is a Payday Loan?

According to The Payday Place, a pay day advance is,

a loan that can get you a sum of money (usually a few hundred dollars) to tide you over until your next pay date.

Seems reasonable…who hasn’t been low on cash a few days before a payday?  Payday Loans usually come with very little, to no, underwriting.  The Federal Trade Commission states that it is simply “… secured by a personal check or paid by electronic transfer.”

If there is no basic underwriting the lenders are taking a huge risk, and as with anything in a capitalistic society, if there is a huge risk there will be massive costs.  Payday Loans come with huge costs.

What does a Payday Loan Cost?

It doesn’t matter if you are doing a payday loan comparison using multiple lenders the costs associated with these types of loans are usurious at best and egregious at worst.  The Missouri Attorney General’s Office provides us with a very useful calculator:

Payday Loan Calculator

So on a $400 loan for 7 days with $15.50 of upfront free you will be paying 806% effective APR.  JEBUS!  If you are in need of cash, there has got to be some alternatives!

Any experiences with payday loans?

4 Responses to What are Payday Loans? Should you Use Them?

  1. I agree, they make ZERO sense, though their proponents claim they serve a segment of society that is grossly under-served by financial services firms. I guess there’s an element of truth to that, but those types of loans are still smarmy and predatory in my opinion.

    I think they’re going to be legislated away before too long.

  2. I don’t think I would ever use a payday loan. Too much interest to be paid off afterwards. I’d rather just borrow the money from a friend at that point.

  3. Sometimes difficult life conditions and financial troubles make us resort to loans which can occur to be really helpful in case you can’t budget cash at hand. In fact, payday loans online are considered to be a good and affordable alternative to traditional bank loans. Actually, banks refuse the constituent part of applications, especially from consumers whose credit history is less than perfect for them. And even, if your credit report is good enough, you will have to pass through a number of complicated procedures and follow a list of requirements to qualify for financial assistance from bank.

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