Many people find themselves in a bit of a money crunch with bills to pay or emergency expenses and they can't wait until their next paycheck. I know this because I've been there. I also know the temptation to fill out a quick online application and pick up a payday loan, but a recent article by CNNMoney shows that isn't the best idea.
According to CNNMoney, almost 12 million people take out a payday loan each year in the United States, each running about $375. These loans are typically given for a short period of time, about two weeks each. Unfortunately, they also come with high fees and when it comes time to repay the short-term loan, CNNMoney says only 14 percent can afford to pay in full. Instead many people choose to extend their loan for another two weeks, adding more fees, and continuing the cycle.
The cycle of extensions and small payments lasts longer than many people realize when they first apply for the payday loan. For example, CNNMoney says that the average person will extend their payday loan for five months and end up paying $520 in fees plus the original loan amount.
Personally, I know this cycle all too well. Several years ago before I knew much about personal finance or how to avoid getting ripped off, my car broke down and I had no way to get to work. But I couldn't afford the $450 fee my mechanic wanted. Not sure what to do I took out a payday loan for $500. And then it started.
When my loan was due 10 days later I didn't have the almost $600 needed to repay the loan and the fees, so I extended it, paying only the interest (less than $100). The next time my loan date rolled around, I asked for another extension and again paid only the interest and a small extension fee. Two months later I realized I had paid close to $400 and hadn't started to repay my payday loan.
Finally I realized I had to do something so I asked for extra hours at work and took a few babysitting gigs. For the next two weeks I worked about 65 hours a week and earned enough to pay off my payday loan and save a bit for the next emergency. Thankfully it taught me a lesson, payday loans aren't the answer to short term problems.
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