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Debt Consolidation – Watch Out For Payday Loans
By: Charles Essmeier
Most any large city has a number of small shops offering payday loans. They’re
often found in strip centers; sometimes they double as pawn shops. They have a
simple business – they lend you money until your next paycheck. The system is
pretty convenient; you write them a postdated check for the amount you’re
borrowing plus interest. On your next payday, they cash the check and your loan
is paid off. What many people who use payday loan services fail to realize is
that the interest rates charged by these firms are substantial, often reaching
the equivalent of four hundred percent per year!
The interest rates charged by payday loan stores varies from state to state, but
a rate of 15-17% for two weeks is not unusual. This translates to 390-440% per
year, which is a staggering amount of interest to pay on a loan. The lenders say
that these amounts are fair, and are necessary to cover the overhead associated
with running a business and to account for a substantial number of borrowers who
fail to repay the loans. That may be true, but that high of an interest rate can
turn the “convenience” of a payday loan into a nightmare. Many borrowers are
relatively low paid blue-collar workers who live from paycheck to paycheck.
Someone who is a “bit short” this week may also find themselves short again on
their next payday. If they fail to pay back the payday loan, the interest
continues to accrue and additional penalties, such as returned check fees, may
apply. It is quite common to see loans of $300 or so turn into debts of several
thousand dollars, especially if the borrower compounds the problem by borrowing
funds from a second payday loan store to pay the loan from the first one.
Several states have already passed laws capping the interest rates that may be
charged on payday loans. Others will undoubtedly follow. A good alternative to
the payday loan would be to take a cash advance on a credit card. There is
usually a fee associated with a cash advance, but the annual interest rate,
combined with the fee, is still a lot cheaper than a loan at 400%. Anyone who is
considering taking out a payday loan should read the terms carefully. Otherwise,
that “loan until payday” could be there to haunt you for a long time.
About the Author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including
http://www.End-Your-Debt.com, a site devoted to debt consolidation and credit
counseling, and http://www.StructuredSettlementHelp.com, a site devoted to
information regarding structured settlements.
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