First Person: How Much Do Payday Loans Really Cost?

Yahoo Contributor Network

Payday, or cash advance loans are temporary fixes for short-term money problems, but probably are not the best option. I know this, because I was once caught in the vicious cycle of payday loans. My credit was atrocious, my bank options limited, I had no credit cards and I didn't have a dime in savings. At the time, these loans were fast and easy to get when I needed them. They helped get me out of a car breakdown bind or other financial catastrophe, and gave me some much needed breathing room. All the same, these loans came saddled with outrageous fees and interest rates. In addition to application fees, payday lenders charge a minimum of $15 per $100 borrowed, but the fees don't stop there. The true cost of payday loans is…costly.

The Basics of Payday Loans

Payday loans grant borrowers funds ranging from a few hundred to a few thousand dollars at a time. The borrower then has to repay the loan with interest (and fees), usually two weeks after origination. As collateral, payday lenders hold personal checks or bank account information for repayment.

Qualifying for Payday Loans

It doesn't take much to qualify for a payday loan. Most lenders have lax requirements. Applicants need to be at least 18-years of age, be a U.S. citizen, have a bank account and be gainfully employed. Some lenders require direct deposit from an employer, others do not.

Costs Associated with Payday Loans

Most payday lenders charge you a specific dollar amount per every $100 borrowed -- usually upwards of $15 per $100 -- as interest. Payday lenders are also notorious for tacking on additional fees for transaction costs.

What Does an Average Payday Loan Really Cost?

When I took out my last payday loan for $500, coupled with the fees averaging $20 per $100 borrowed, I had to pay back $600 two weeks after the loan origination. If I came up short (which happened often), I would have to extend the loan, paying the $100 interest charges to extend another two weeks. Suddenly, my $600 payback was really $700. When I extended again, I was paying back $800. To put it in an even more disturbing perspective, if I spread that loan out over a year I would have paid $2,600 in interest alone. That's 500 percent APR.

Stuck in a Cycle

When you are low to middle income family, it's easy to get stuck in the payday loan cycle. The money you spend and then subsequently borrow becomes cyclical and you feel as though you are falling further and further down a financial well, from which there is no escape.

Breaking the Cycle

The only way I was able to break the cycle of refinancing a 500 percent APR loan was to set aside money each week, allocated to repaying that loan. And while I wound up throwing away thousands of dollars in interest during the few years that I was down and out, I have learned enough to never do it again. Today, I keep a credit card for emergencies, and an emergency fund. And I do this because I know what payday loans really cost me, and take it from me, it's not worth it.

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

More from this contributor:

6 Easy Steps to a Mortgage Refinance

How Much Can You Save by Refinancing Your Mortgage?

6 Money Mistakes I'm Not Making

View Comments