It seems you can get one almost anywhere. Payday loans are advertised on the internet, television, the radio and even in the mail and they come at a very high price but what are payday loans and are they really a good idea?

You may be strapped for cash but is it worth it to go the payday loans route?

Payday loans are offered by finance companies and check cashers who are now granting small, short-term loans called payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.

What happens is this: a person wanting to borrow money writes a personal check to the lending company for the amount he or she wants PLUS a fee. The borrower is given a check by the lender for the loan amount (minus the fee, of course). Simple isn’t it?

Bear in mind that the fee charged is usually a percentage of the face value of the check or a fee charged per amount borrowed. For example, let’s say that you need an amount of $50 to $100. If you then extend the loan for another two weeks you pay additional fees for each extension period.

How Are Payday Loans Controlled?

The Truth in Lending Act states that the cost of payday loans (like all other forms of credit) must be disclosed. You must receive, in writing, details of the finace charge (a dollar amount) and the yearly percentage rate or APR i.e. the cost of credit on a yearly basis.

What Is the Cost of a Payday loan?

Like all forms of credit a payday loan will cost you and it can be a pretty expensive ‘purchase’. If, for example, you issue a check for $115 to borrow $100 for a repayment period of up to two weeks, the check casher or lender will agree to hold the check until your next pay date. When the day rolls around the lending company will deposit the check and you redeem the check by paying the $115 in cash or you have the option of extending the loan for another two weeks by paying a fee.

The initial loan is a $15 charge and a 391 percent APR! If you extend the loan three times the charges amount to $60 – all to borrow an amount of $100!

Are There Better Alternatives to Payday Loans?

Yes! Before you consider a payday loan consider one of the options below:

1. If you need to buy on credit shop very carefully and compare offers. Try to find a credit offer that has the lowest APR and consider a small loan from your credit union or small loan company. You might also ask for a salary advance from your employer or lend from family or friends rather than applying for a costly payday loan. It may be possible to get a cash advance on your credit card but that may come with a very high interest rate so do your homework. Local community groups sometimes make small business loans too.

2. Get the lowest finance charges (loan fees, interest and credit costs) by comparing the APR’s of several different options.

3. It may seem pretty obvious but you would be surprised to learn how many people fail to ask their creditors for an extension on their bill payments. Often they are amenable to this as long as they are notified. You may be charged interest on an overdue account after some time has passed so make sure what costs will be incurred and decide accordingly.

4. Budget realistically and calculate your monthly and daily expenses. Never buy what you cannot afford, several small items add up to big debts.

5. Save some money each month for emergencies but try not to touch it as this defeats the object of the exercise. You could put the fee amount of your hypothetical payday loan in a savings account each month for a period of six months instead of taking the loan.

6. Get overdraft protection on your checking account. If you usually use all the funds in your account each month overdraft protection will ensure that if you make a mistake in your account ledger or records you will avoid making things even worse. Make sure you understand the terms of your overdraft protection.

7. Contact your local consumer credit counseling office for help with a budget or debt repayment plan. There are good non-profit organizations in every state that offer sound guidance to get you out of debt. Ask your employer, credit union or housing authority for a no or low cost credit counseling program.

Tips for Making Use of Payday Loans

Only borrow as much as you can afford to repay when your next pay date arrives.

Remember to keep enough to make it to the next payday!

Only make use of payday loans if you really have to – try the above seven steps first and stay out of debt. You will feel better and won’t get ripped off! Payday loans should be your last resort.