Pay Day Loans - Convenience and Danger

Every now and then a financial emergency arises that you just did not have planned in your budget. Maybe you had a fender bender with the car and you need cash to get it running, but the check from the insurance company will take a week or so to get here. Or the refrigerator or washer craps out and you don't have the cash to get it repaired, but you also can't afford to be without it. You have run out of money before you ran out of month. Or, you have a once in a lifetime chance to buy something you really, really want at a spectacularly low price, but don't have the cash.

One solution to your "one time only" dilemma could be a Pay Day Loan - this is where loan companies will give you a short-term loan, just until your next payday. If you qualify, many of the companies will lend $100, to as much as $1500, for a short period of time. Mostly what you need to qualify is a job that provides you with a regular paycheck and an active checking account. You will probably need to show them a recent paycheck stub and they will probably call to confirm that you haven't just been laid off and, therefore, have no next paycheck coming.

A loan for a car or a boat, or a mortgage to buy a house, are secured loans - the value of the asset serves as security for repayment of the loan. A Pay Day Loan is an unsecured loan - there is no property to serve as security, only a contractual promise to pay. It is a signature only loan. Usually this kind of loan is for a term of not more than two weeks.

Pay Day Loans may be convenient, if you have an occasional need. But this kind of loan is very expensive. Typically the fee to borrow $100 for two weeks is over $15, more than 15%. The annual percentage rate is staggering.

If you take a Pay Day Loan, the loan company will probably require that you give them a post dated check for the full amount due (including their fees). Come pay day you are expected to show up and pay the amount due in cash - and they will then give you back the post dated check.

If you are not able to pay off the principal amount on the due date, the terms of the loan agreement may allow you the option of renewing the loan by paying just the interest due, bringing your interest cost for borrowing $100 to a total of $30 for four weeks.

If you don't show up to pay off the loan, they deposit your check. If the check bounces, for insufficient funds (possibly why you didn't show up in person), you have even greater trouble - you owe them everything you originally did plus bank fees for a returned check plus their fees for collecting the money owed. And, generally speaking, it is against the law to write a check that is a "bad check". If you do it, legal action can be taken against you - further complications, problems and costs.

If you fail to pay off the loan, as agreed, the loan company can file a lawsuit and obtain a judgment against you. With that judgment they can obtain an order to garnish your wages to collect the debt owed. Generally the contract also makes you liable to reimburse the company for all its legal costs and costs of collection, adding further to the cost of you borrowing.

The most important thing about this kind of credit is to use it only when you need some money for a truly temporary situation and where you can fix the situation very quickly.

You may have heard stories of people who used one credit card to pay off another credit card, then a third to pay off the second, then a fourth to pay off the third, etc., with their debt spiraling totally out of control.

Well, the same kind of thing can happen with Pay Day Loans if you are not careful and responsible in how you handle your finances. This is not a long term, or even intermediate term, financing method. This is a one-time-only emergency funds technique and to use it any other way could be very risky and extremely expensive.

How big is the Pay Day Loan industry? The Center for Responsible Lending (http://www.responsiblelending.org/) reported in 2006 that there were about 25,000 outlets in the U.S. making Pay Day Loans.

If you were considering a Pay Day Loan it would be worthwhile to check it out thoroughly before applying and signing those papers. The Consumer Federation of America is one place where you can get a variety of information to help you evaluate the situation. The information there explains, in detail, the mechanics of a Pay Day Loan. According to the CFA (http://www.paydayloaninfo.org/), industry analysts estimates $40 billion in Pay Day Loans are made every year in the U.S.

No matter where you live, you can probably find a company locally that will make Pay Day Loans. There are also many companies on the Internet, which make these loans. As in any business, there are reliable firms and firms who will try to twist the laws and regulations as far as possible. Companies who operate on the Internet are harder to effectively regulate than companies with a physical office right there on Main Street in your hometown.

If every week in your life is an emergency, if every payday is a panic, then using Pay Day Loans will probably only make a bad situation much worse.

On the other hand,

* If it is truly a one-time emergency, and

* You have a clear plan which assures timely pay off of the loan, and

* You have researched the potential problems, and

* You have carefully selected a reputable loan company, and

* You have researched and understand all the terms and conditions of the loan

then maybe - just maybe - a Pay Day Loan is the right thing for you to do.