If you believe what you see in television commercials, then you might think that a payday advance is an awesome, convenient, easy way to get your hands on some cash when an emergency crops up. However, payday advances can become expensive traps that put your finances in a far worse position than they were in to begin with.
What is a Payday Advance?
A payday or cash advance is a small, short-term loan that is “unsecured.” By unsecured, we mean that there is no collateral given to the lender in exchange for the funds that you are advanced. Often, you can bring a paycheck stub to one of these lenders and walk out with a check for a few hundred dollars in under an hour.
The Problem with Payday Advances
The first problem with the concept of a payday advance is that, generally, the entire loan must be paid back on your next payday. It is extremely possible that you may not be able to afford to pay back the loan all in one fell swoop. By obligating the money in your next paycheck this way, you could end up being short of funds again very quickly after payday which may push you to take out another loan and establish a very dangerous routine.
Another big problem with these relatively small loans is that they have extremely high interest fees. Consumer Reports reported in 2009 that a 16-day, $400 loan had cost one borrower $120 in interest charges. While some states put caps on the amount of interest that can be charged on these loans, they often still allow for 30 percent or more interest, which few people can actually afford.
If you truly have an emergency and do not have the savings to handle it, you may be better off using your credit card than a payday advance loan. At least with your credit card, you can break the payments down over several months and you will generally avoid usurious interest rates. But nothing beats having an emergency savings with funds that you can immediately access when the world throws a roadblock your way.