Ever Thought to Use a Payday Loan?

Posted on January 17 2007

What is a Payday Loan? A Payday Loan is a short term loan that typically needs to be repaid within 7-14 days from its origination. These loans are usually set up using a post-dated check. The process works like this: First you write out a check for $400.00 that is post-dated to correspond with your next pay period. The lender then gives you $300.00 cash to use as you see fit. Once your scheduled due date rolls around your lender will cash your post-dated check. If you do not have the funds available on the scheduled due date, your lender will often allow you to pay what the industry terms a “renewal fee”. This renewal fee will prevent the lender from cashing your check. The renewal fees are typically in the range of $40.00 to $80.00. Most lending companies will allow you to pay the “renewal fees” every two weeks to prevent them from cashing your check.

Why are there so many different Payday Loan opportunities? The best answer for this would be that it is currently a very profitable business to be associated with. I do not know any other type of business or investment that has the Annual Percent Rate (APR) of return that a Payday loan is legally able to secure. The APR that a customer pays when working with payday loan companies is usually in the 250-550% range.

Do I recommend people use Payday loans? Absolutely not! I have yet to come across a situation where using this lending practice was a good decision. The story we often see is that a person will take out a payday loan. That person will go out and spend the money they were issued. Once the loan comes due that person is naturally unable to pay the loan in full. Not only have they paid out $100.00 in fees but they have also spent $300.00 of their upcoming pay check. Once this happens, the customer may feel forced to take out another payday loan or pay the “renewal fee” to prevent the check from being cashed. These clients get into the cycle of paying renewal fees for months and months in fear that they will be prosecuted if the check was cashed with no funds available.

Imagine paying $80.00 every two weeks for 6 months in order to prevent a check from being cashed. Essentially that client has paid out $960.00 in renewal fees that will not be credited against the original loan of $400.00. Now this is an extreme case however we are seeing an ever increasing number of people falling into the Payday loan trap. We work with individuals and families who have secured up to fourteen payday loans at a time. This lending practice is a very financially draining situation to be involved with however it is not too big for our God.

If you or someone you know has fallen into this trap and feels as though there is no way out I would encourage you to take hold of Proverbs 3:5,6: Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge him and he will make your paths straight. You may not understand how or why things have gone the course they have but remember that God cares about you and loves you. He does not want you living under any financial bondage. It is difficult for anyone to hear God’s voice when we are being financially crunched each day. I encourage you to call us if you would like some assistance or ideas on what to do in your situation.

-Joe Larson FLCS Certified Credit Counselor