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Planning your financial future

Are payday loans the best solution?

In a financial emergency learn what you need to know and what solutions are best to use.

You need money in a hurry, is an emergency loan like a payday loan the answer? The payday loan industry has come under close scrutiny in the last few years. This has regulators such as the Consumer Financial Protection Bureau ramping up efforts to pull back the reins on payday loan lenders in order to prevent them from lending money to borrowers who simply won't be able to repay these high-cost, high-risk loans. Even President Obama weighed in, noting that some payday lenders may be “trapping hard-working Americans in a vicious cycle of debt”

If you're in the dark as to how payday loans work and want to know more, here's some useful information.

1. Payday loan lenders tend to pop up in underserved communities where banks won't build

This might make them sound like benevolent enterprises intent on offering banking services when and where traditional banks won't, but here's the catch: the terms offered on payday loans can be significantly higher than those offered by a typical bank. In fact, borrowers may end up paying as much as 1000% APR over the life of a loan.

2. Payday lenders allow borrowers to write a check they can't always cash

Payday loans are called “payday loans” because the borrower writes a check to the lender for the amount borrowed, plus lending fees, and the lender holds it until their next payday (this could be in two weeks or even a month). Almost anyone can use a recent pay stub as proof of employment to qualify for a loan. It sounds simple enough, and if you know that your check will clear on the date specified, it doesn't get any more complicated than that. However, if the unexpected happens and you don't repay the money by payday, things can start to get very complicated, very fast.

3. Payday loans are short-term loans that typically have very high interest rates or even fees attached

Borrowers are responsible for fees associated with the initial loan, and after payday rolls by, they may be hit with a fee for every $100 or so they have borrowed. If the borrower can't pay the loan off right away, they can extend the loan, but fees continue to accrue bi-weekly or monthly, depending on the loan terms.

4. Payday loans market themselves as a quick-fix, but they may be creating a financial sinkhole for people already experiencing financial difficulties

Payday loans are also frequently referred to as “no credit check” loans. These loans are especially appealing to individuals who lack a financial safety net, such as a savings account or credit card. Unfortunately, a payday loan that can't be repaid will only exacerbate the financial situation of people who have already exhausted all other financial options.

5. Payday loans should only be taken out to address a one-time emergency expense

These types of loans should not be used as a solution to recurring bills or ongoing debts. If you're having trouble paying your bill payments on time, talk to your creditors or utility providers about adjusting your monthly payment amounts, or going on a temporary financial hardship forbearance. Do note that temporary debt solutions such as borrowing money from a friend or family member, getting a small loan from a bank, securing a payday advance from your employer, or even charging an emergency expense to a credit card, are widely considered to be preferable alternatives to taking out a payday loan.

Payday loans are not for everyone. However, if you ever find that you have a need for such a financial service, be sure and get all the facts before you borrow against your next paycheck.

If you need help preparing for the unexpected, you can find some very helpful advice on setting up an emergency fund and creating a budget and prioritizing your spending in the Protective Learning Center.



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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

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