How to Use Payday Loans Wisely

Recently, payday loans have come under fire from critics charging that these types of loans come with exorbitant finance charges and interest rates.

Opponents of the payday loan industry argue that because of these extremely high interest rates, these loans can trap their customers in a cycle of debt.

However, proponents of payday loans contend that these loans can serve as a quick and convenient means to secure short-term loans. They point out that the high fees sometimes associated with payday loans can be avoided if borrowers use payday loans responsibly.

The Costs Associated with Payday Loans

Payday lenders typically charge fees ranging from 10 percent to 25 percent of the value of the total loan. To determine these finance charges, the lender takes into account the loan as well as the fee.

If a payday loan customer obtains a $500 payday loan from a lender that charges a 15 percent finance fee, the customer would need to pay a $75 finance charge for the loan. Since the finance charge is included in the $500, the customer would receive $425 total ($500 minus the $75 finance charge). In this case, the annual percentage rate, or APR, would be 460 percent.

While 460 percent might seem high compared to the interest rates associated with other types of loans, if one considers the fee to be only $75, that amount might seem reasonable.

What tends to get payday loan customers in trouble is when they are unable to repay the payday loan by the original due date. Payday loans generally must be paid in full within 14 to 31 days. However, if a borrower is unable to repay the loan by the original due date, he or she does have the option to extend the repayment period. This move, however, comes with additional charges.

If the payday loan customer cited above were unable to repay the $500 payday loan by the original due date, he or she would be able to extend the loan for another two to four weeks. By extending the loan repayment period, the borrower would be charged an additional $75 fee.

The total finance charges now would equal $150, which equates to an APR of 920 percent. The more the borrower extends the loan, the more charges are assessed by the lender and the higher the APR will increase.

Using Your Payday Loan Responsibly

The best way to avoid these types of high payday loan fees is by using the payday loan responsibly. By taking the following steps, you should be able to avoid becoming a payday loan statistic.

Step 1: Shop around for the best payday loan offer.

Many payday loan lenders offer special discounted fees to new customers. These discounted fees can help significantly in reducing the total cost of the payday loan.

Step 2: Borrow only what you need.

One mistake payday loan customers make is borrowing more than they actually need. Payday loans should be used only when absolutely necessary and should not be used to purchase unnecessary items.

Step 3: Read the payday loan contract carefully.

Payday loan customers should make sure they understand every aspect of their payday loan contract. When obtaining a payday loan, make sure to read the terms and conditions of the contract carefully and do not be afraid to ask questions if you do not understand any part of the process.

Step 4: Make sure to repay the payday loan by the original due date.

Payday loan customers should do everything they can to ensure they are able to repay the payday loan by the original repayment deadline. Remember, extending the repayment period is what gets borrowers into financial trouble.