As a working consumer, you can sometimes find yourself in need of cash prior to the next payday. Depending upon your financial situation, it may not be possible to get a traditional loan from a bank. Payday loans can fill the void, but it's prudent to understand what can happen if you don't repay the loan.
Identification
A payday loan is a short-term cash advance issued by a payday lender that consumers take out against a future paycheck. Consumers must have a job and a checking account and present a paycheck stub to qualify. With a payday loan, a consumer writes a personal check to the lender to cover the amount of the loan. The check is dated for the next date the consumer gets paid. Consumers can obtain a payday loan in person from a lender or online.
Considerations
You can use a payday loan between paychecks when you need cash. According to MarketWatch, the segment of the population that most often uses payday loans are the unbanked, or those who don't have access to traditional credit options, such as bank loans or credit cards. Payday loans come at a steep price, often carrying three-digit interest rates, however. They have large fees that you must pay back in addition to the borrowed loan amount. Payday lenders charge a set fee for each $50 or $100 increment of the loan, according to the Federal Trade Commission.
Effects
When you take out a payday loan, the lender cashes the check you've written on the date indicated on the check. If there aren't enough funds in the account, that check may be returned, and your bank could charge you overdraft fees. If you know you're unable to repay the loan, the lender allows you to pay the finance fee to roll the loan over until the next payday. On that day, you have to repay the original loan amount plus all accrued fees and interest.
Warning
Because of the fees, payday loans can balloon into an amount that becomes unmanageable. If you fail to make payments, the payday lender can turn the debt over to a collection agency. The agency can sue you and obtain a judgment against you. Once a judgment is entered, that agency can then garnish your wages or seize your bank accounts. Payday lenders can't have you arrested for check fraud or writing bad checks unless they can prove you had no intention of repaying the debt at the time you took out the loan, which is difficult to do, according to Bills.com.
Prevention/Solution
If you have a payday loan that you can't pay, visit the lender and try to work out a payment plan, according to financial expert Dave Ramsey. This may prevent the lender from turning the debt over to a collection agency. To avoid payday loans in the future, Bankrate suggests you consider other alternatives, such as borrowing from a family member, getting a part-time job or obtaining a small loan from a credit union.
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