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Risks and Benefits of Taking Out a Payday Loan

Payday loans (cash advance loans) can be costly for consumers who don't do their research. There are risks and benefits to payday loans, so it's important to research other options first, and make sure you understand the laws in your state before you agree to anything.
is a good idea to check how much you can get in your state according to the law.

Benefits to Payday Loans

Payday loans are all about quick, unsecured cash to help you with emergency expenses. The lender accepts your post-dated personal or business check for the amount you need plus any service fees and interest charges. They don't cash the check until the agreed upon date.

Say your paycheck comes monthly or semiweekly (every two weeks), and your radiator springs a leak. You need your car to get to work, but until your next paycheck, you don't have money to afford the repair. With a payday loan, you can access the funds from your next paycheck immediately, pay for the emergency repair, and pay it back when you get paid.

If you have poor credit, there are no worries of credit checks with a payday loan. As long as you pay the loan back on the agreed upon date, you'll usually avoid high fees and interest charges. This makes them a better choice over using a credit card.

There are protections in place for military members and their dependents. Payday loans can help fill gaps between the time military wages are paid. In any situation, military members cannot be charged more than 36% interest thanks to laws enacted in 2007.

Risks with Payday Loans

Unless your state regulates payday loans, the fees and interest charges can be extremely high. If you reach the agreed upon loan payment date and don't have all of the money, you'll have to roll the loan over for another few weeks. Now you face the processing fees and interest charges that can virtually double what you originally borrowed.

Look at the APR for a payday loan. If you borrow $500 for 14 days and the fee is 15% of the loan value ($75), that puts the APR at 391.07%. That's a huge interest rate to face.

Before You Apply for a Payday Loan

Make sure you've tried to get the money through other means. If you need to borrow the money to pay bills, talk to the lenders or companies to whom you owe money. They may be willing to grant you an extension or work out a payment plan. Borrow money from family, if you have that option. Sell items through the classifieds or Craigslist. Military families can approach military aid providers to seek financial help until paychecks arrive.

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