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Payday Loans: Risks, Costs and Benefits

October 15, 2012
Plain English Version

Usually, when people take out a payday loan they intend to pay it back on their next payday. That is the idea. The loans often cover unexpected costs such as car repairs or a medical problem.

But when a payday loan is used for ordinary things such as food or rent, the borrower is facing real money problems.

Payday loans are expensive. Lenders charge fees based on the amount of  the loan. Most states make the lender tell the borrower how much the loan will cost if it is repaid by the next payday.

For example, Illinois lenders charge $15.50 for a $100.00 loan. If the borrower borrows three more times during the year, the amount of fees comes to $62.00.

Twelve million borrowers in the United States spend $7.4 billion on fees for payday loans each year.

In one example, if a borrower takes out $375.00 in a payday loan eight times in a year, the cost will be $440.00. If the loans are rolled over (continued) three times in the year, the fees will reach $534.00.

Experts say there are five things to consider when taking out a payday loan:

  • Do you really need it?
  • Will it take you longer to pay it off than you think?
  • Are there other options?
  • It could ruin your credit score
  • Payday lenders rely on your bad financial habits

Most people agree that payday loans used rarely can be of help in certain situations. However, relying on them to meet routine expenses is a recipe for crippling debt.

The Wall Street Journal

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