Q&A: How do payday loans work?

Question by Joey: How do payday loans work?
I need a bit of money to catch up on some things. About 1500 dollars. I make about 300 a week. Will I be able to get a 1500 dollar loan from a payday place and pay it back over time?

Best answer:

Answer by Ben Jones
These loans usually carry a high price tag. Finance charges are from 15 to 30 percent of the amount being borrowed. Since it’s 15 to 30 percent on just a few weeks, if’s comparable to getting a loan with an annual percentage rate of nearly 800 percent.

Because payday loans are so easy to get and lack the traditional credit checks, companies often prey on lower income neighborhoods knowing they are more likely to obtain one of these loans. The down side to this is most of these people are already experiencing financial hardship and borrowing money with such a high interest rate just makes matters worse. In addition, many of these people find themselves unable to repay the loan when it comes due. This situation leads to additional bank charges for bounced checks and the cost of the loan, or they have to extend the loan causing even more fees. Many of these people trap themselves in a vicious cycle. They pay the loan off on the next payday, but discover they do not have the funds needed to cover their expenses. They then find themselves going back for another payday loan. This cycle can continue indefinitely since there is no limit on how many times a person can get this type of loan.

Payday Loan Alternatives

There are many alternatives to getting a payday loan. The best thing you can do to avoid these types of loans is to create a budget so that you afford paying the bills. Cut out as many unnecessary purchases as possible. Put that money into a savings account.

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