I’m taking a government class currently and the professor was trying to make a point about the IMF when she said, “what’s the lending place with the caterpillar?” Immediately three students blurted out “Money Tree.” I can’t think of better evidence of how prevalent the marketing for payday loan and check cashing “businesses” has become.

So it’s important for people to understand how expensive those loans really are, and more importantly what they can do to avoid having to take one out.  For those unfamiliar with the process here is a quick summary of how these loans work. In this example you want to borrow $100. So you write a check for that amount plus the fees the payday loan place is charging. Typically these fees run about $15-$30 per $100 borrowed. So you give them the check and you leave with $100, and they deposit your check on payday. Given the short time period of these loans the average borrower is paying 400+% APR. Couple that with the industry’s often shady practices in allowing people to roll-over these loans for multiple time periods and the $100 you borrowed ends up costing several times that in interest. For short-term cash here are some better suggestions:

  1. Ask your creditors for more time to pay your bill. If the money is to cover a utility bill or something similar it never hurts to ask if you can move the payment date back a bit. Also ask about fees for late payments or additional interest that might be incurred.
  2. Work on a budget. By knowing where your money is being spent you can more easily identify things you can forego in an emergency. And by cutting out those expenses early you can build up an emergency fund that eliminates these cash crises altogether.
  3. Ask a friend or family member for a loan. This can be dicey, so put all terms in writing. But even if you offer them a very high interest rate it will still be far less than anything a payday loan offers.
  4. Ask your employer for an advance. This isn’t a loan so there isn’t interest due.
  5. Find out what a cash advance on your credit card would cost. There will be fees but again, it should be less than a payday loan.
  6. Look at the overdraft protection on your checking account. You don’t want to do this often (ever, really) but if the fees from your bank are cheaper than a payday loan than this is the better option.

Ideally you should establish an emergency fund and budget your money, at least a little bit, so you don’t have these problems sneaking up on you. But if you just have to take out a payday loan, at least be aware of all the terms and fees involved, and don’t roll over the balance even once.

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