Saturday, November 6, 2010

Payday Loans (aka Paycheck Advances)

A payday loan (or paycheck advance) is a short term loan that's designed to cover the borrower's expenses until the next payday.  Sometimes, this type of loan is also referred to as cash advances.  (Cash advances can also be taken against an existing line of credit like a credit card.)

Payday loans don't fall under as strict legislation like conventional secured loans (homes, cars) and unsecured loans.  It is common to have a payday loan have an APR of over 50%.  Therefore, it is imperative that the individual who takes out the payday loan pays it back as soon as possible to avoid extreme interest charges.

Paycheck garnishments are never fun.
If necessary, only use payday loans as a short term solution to a cash shortage problem.  People who run payday loan shops know that the business is very profitable.  Since you use your paycheck in the application process, a default on the payday loan can easily be taken to court, and a judgment will result in a garnishment of your wages.  A $200 loan could eventually turn into a couple thousand dollars if the process is dragged out long enough.  Also, your credit score will dip due to the default.