The Payday Lending Problem

Before you can have a solution you must understand the problem. Let's start with the basics of how payday loans work. Keep in mind this is only one scenario and there are other flavors of payday loans but the principle described here are the same. We need to make sure you understand the key points that caused you to be in the financial situation you are currently facing.
 

How Payday Loans Work

Payday loans are short-term cash loans based on the borrower's personal check held for future deposit or on electronic access to the borrower's bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive either cash or an electronic deposit into their checking account.

In the case of a store front payday loan lenders hold the checks until the next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period.

If the loan was originated via the internet, the payday loan company will debit the fees and the balance from the borrows account on the customers next payday. If the borrower is unable to pay the full amount the payday loan company will "rollover" the balance of the loan and only withdrawl the fees. The next payday the same cycle continues.

Amount Financed
The amount of credit provided to you or on your behalf. (This is typically the amount of cash you will receive.)

Finance Charge
The dollar amount the credit will cost you, or the amount of interest you pay for receiving the credit.

Annual Percentage Rate (APR)
This term depicts the cost of your credit as a yearly rate. Because these loans are small, short-term transactions, the APR is typically quite high.

Total of Payments
The amount you will have paid after you have made all payments as scheduled. (This is the amount of your postdated.)
 

The Problem Identified

The main culprit is the high APR (Interest). To explain better, let's say you borrowed $1,000 and your postdated check is made out for $1,250. That means you are paying $250 in interest and fees for loaning you the $1,000 for two weeks. However in two weeks they try and cash your check and it bounces or you call them and tell them that you can't cover the check right now. This is not only ok, but Payday Loan companies are perfectly fine extending the terms for another two weeks. Just pay the $250 for now and then in two weeks you still owe $1,250 again, hopefully no more. As you can see this cycle can continue. In the case above if you extend this twice, that is four weeks and you just paid $500. At those rates it can make it very hard to pay back the fees plus the loan amount.

If you could have borrowed the same $1,000 for two weeks and only had to payback $50 in interest and fees then it would be much easier. The payday loan providers really have a hard time offering at this rate because of the risk factor they are dealing with. If they are not making enough money, then these types of programs would be much harder to find. Not defending them, many charge much higher than they should.

Many times the first payday loan you get works out because you are more aware of the fees and your responsibility. And that is good because they provided you a service for a fee and all worked as planned. Sometimes though this can lead to making it very easy to get money. Very simular to credit card debt. Because it becomes easy to borrow you may find yourself using it more or getting more than one payday loan. Now you can find yourself in a situation that is very hard to get out of. This is where we can come in and help show you the options.