The two most common ways that people get into trouble with payday loans are taking out multiple loans from multiple companies and taking out rollover loans. However, you can typically avoid these problems by carefully considering how much loan you can truly afford to take out.
Payday advance companies usually have you over a barrel when it comes time to repay. They are the first creditor to receive any money because they either have a signed, post-dated check in hand or have your bank account information and can process an automatic withdrawal. If they have the check and can’t cash it, some states will pursue you just as if you’d written a bad check to any other merchant, a situation that could carry criminal consequences.
Of course, this is the way that payday advance companies make most of their profits. By ensuring that you deal with them first, they can usually secure you as a repeat customer, which is the only way that most payday advance companies can turn a profit on the practice of short-term lending.
Rollover Loans are Dangerous
Payday advance loans carry high-interest rates and fees. The annual percentage rate (APR) of each loan is typically between 300% and 500%. This can mean a $15 charge when you take out $100 once, but it can mean thousands of dollars in lost income if you are forced to take out the loan again and again.
People typically take out rollover loans because they borrow most of their paycheck. You are, of course, going to need all or most of your paycheck when it arrives. You simply won’t be able to afford to repay a too-large loan in full.
Some companies advise solving the problem with a “step-down” loan. In a step-down loan, you take out $500. You pay back the $500 in two weeks and then immediately take out a loan for $400. In two weeks, you pay back the $400 and take out a loan for $300. Even if you ultimately pay off the loan, you’ll still have lost over $100 in fees. This can be a significant loss when you’re living paycheck to paycheck.
Multiple Loans are Deadly
Every payday advance company will pay lip service to the notion that you should not take out more than one payday loan at a time from more than one company. They will place it in their paperwork and will even verbally counsel you against it.
The reality is quite a bit more complicated. Every cash advance store manager is usually under a lot of pressure to “make the numbers.” That means most of them will look the other way, even if they know for a fact that you have taken out another loan.
In fact, in the bad parts of town, it’s not unusual to see 4-5 stores from different companies all clustered together. That’s because some customers bounce from store to store to store, juggling multiple loans to make ends meet.
Eventually, all of these loans will catch up with you. When they do, you could be hundreds of thousands of dollars in debt. Think carefully about the problem that is making you consider a payday loan in the first place. If you are like most people, the problem costs less than $500 and is far more solvable than $60,000 in bad payday loan debts and fees.
Payday Loans are a Tool
Payday advance loans aren’t the devil. They’re simply a tool. Like a power saw, they can become dangerous if mishandled, but they can have their place if you are living paycheck to paycheck. You simply need to keep your eyes open when you use them.
That means staying informed, staying educated, and thinking hard about what you’ll be able to handle.
Make the Decision Yourself
Don’t rely on the cash advance company to tell you how much loan you can afford. You’ll typically encounter one of two scenarios.
In the first scenario, the cash advance lender will lend you ¼ of your next paycheck and no more. This may happen to coincide with what you can afford, or it may not.
In the second scenario, the cash advance lender will pressure you to take the most profitable amount that they can get away with without absolutely guaranteeing a default. For example, if your check is $600 every two weeks, they will try to sell you on a $500 loan.
The store manager doesn’t know your personal financial situation in either case. Payday advance loans are often created and made regardless of your ability to repay them.
How to Tell How Much You Can Afford to Borrow
Take the amount of your next paycheck. Then, subtract the payday advance loan you are planning to take out, minus the fees.
Add up the bills you will have to pay on your next paycheck, ignoring anything that isn’t urgent. If it can’t be turned off, repossessed, taken away from you, or cause you to starve, it will probably be okay until you can get caught up.
If you can meet all of the truly necessary bills, the ones that could really mess up your life if left unpaid after paying the payday advance loan (plus the interest and fees), then you’ll probably be okay. If not, then you need to reconsider the loan amount or reconsider taking out the loan at all.
You need to think of the advance money as money that is gone from your paycheck, not as money that you are getting early. That is the only way that you can handle a payday advance loan safely.
If you can’t afford to lose one dime from your paycheck, then you need to consider some alternatives for handling your financial emergency. Sell something on Craigslist or eBay. Babysit someone’s kids or haul some boxes for a few hours. Use your creativity and negotiation skills to buy you some time, some extra cash, a payment plan, or a cheaper deal. You may surprise yourself by learning that you never needed to take out a payday advance loan at all.