There are thousands of companies offering payday loans. These short term loans or cash advances are particularly attractive to young people with little or no credit and little or no savings. Financial experts advise that these loans should be avoided whenever possible. If you are considering applying for a payday loan and you currently struggle to make it from one payday to the next, a loan of this type may hurt rather than help.

Fees and Interest Rates

Payday loan companies require the applicant to provide a post-dated check or in the case of internet companies that offer these loans, bank account information, social security numbers, employer information and other personal information. (First of all there is a question about the safety of transmitting this information over the net and anyone who does it should make sure that they are dealing with a secure site.) The Truth in Lending Act requires these companies disclose all costs associated with the cash advance, before the loan is made. It is advisable to read the fine print. The company will charge at least $10 per $100 loaned, which is equivalent to an Annual Percentage Rate (APR) of about 261%. (The average APR for credit cards is only around 14%) If the borrower is unable to repay the loan in two weeks or on his/her next payday, a roll-over fee is charged. This fee is usually equivalent to the initial fee. The Federal Trade Commission reports that in some cases individuals have paid as much as $60 to borrow $100. It is easy to see why a payday loan is sometimes called a “debt trap”.

Alternatives to Payday Loans

Financial experts advise consumers to consider all the alternatives before taking a payday loan. There are special services for military personnel and their dependents in need of financial assistance. For other individuals, it may be possible to obtain a small loan from a credit union, a bank or a cash advance from an existing credit card. Any of these options will generally offer lower fees than a payday loan. Also, it is often possible to negotiate with creditors, utility companies, landlords and other “bill collectors” for additional time to pay. This could be the least expensive option. Even borrowing from family or friends until “next payday” is more attractive than getting caught in the payday loan trap.

Last Resort

If you have considered all of the options and you still want to apply for a payday loan, be smart, compare offers and shop for a low fee and APR. Make sure that you only borrow as much as you will realistically be able to pay back on your next payday. Try not to put yourself in the position of using these loans over and over again. Everyone runs into unplanned expenses occasionally. Financial advisors recommend that you avoid impulse spending, even small purchases add up, and try to start a savings account to cover those emergencies that create a need for payday loans.