Background

• Payday loan lenders use a paycheck stub to advance you a portion or all of your income for a specific period of time. In return, you pay an interest fee when you repay the loan. Payday lenders are often considered a solution when you are in a very tight pinch for cash but know you will have a paycheck in the future; through the advance, you can bridge the gap between checks. However, payday lenders have a long history of bad reputations in the lending industry. In fact, payday lending is even against the law in some states, such as Georgia and the District of Columbia.
  
  

Structure

• The reason for payday loan regulation is the high risk associated with this debt. The lender knows the borrower needs cash immediately, and this allows a lender to take advantage of the borrower. Some payday lenders charge an annual fee to be eligible to use their services, and others apply fees to each loan. All payday lenders will charge a high interest rate compared with other forms of loans.
  
  

Risks

• Due to the high costs involved with payday lending, the risks are plentiful. First, many borrowers cannot repay the debt in full once they receive their paycheck. Many payday lenders will offer to roll over the debt into a new loan, which is prohibited in some areas. Others will simply tack on huge fees for the late or partial payment. As a result, it is not uncommon for a borrower to be stuck under payday loan debt for months or even years, and the sum owed can continue to grow despite the borrower's best efforts to repay.
  
  

Consequences

• Payday lenders are known for their ruthless tactics to recover debts. They may send you to a collections agent after just one missed or late payment, and they will begin knocking down your credit score nearly immediately if you do not pay on time. This can force you into an even worse financial position because it can disqualify you from receiving more legitimate loans in the future.
  
  

Alternatives

• Avoid payday loans when possible. Ask friends and family for a loan, ask a lender or other creditor for a loan extension or ask a landlord to set up a payment plan so you can avoid taking on new debt. If none of these options work, consider taking a personal loan from a traditional lender, such as a bank, to meet your financial demands. Take a payday loan only if the consequences of not taking the loan, such as eviction, would be more damaging than the consequences of taking the loan.