If you find yourself in need of money between pay periods, a payday loan could help you bridge the gap. Payday loans are high-interest loans that span a short period of time -- typically two weeks or less. You must pay off any payday loans you take out when you receive your next paycheck. Neglecting to pay your payday loan balance on time carries considerable financial consequences.
Paying Late
When you apply for a payday loan, most payday lenders will require that you provide the company with a check for the full loan amount, including interest and any additional fees the company charges for its services. The payday lender holds your check until your next payday. If you do not pay off the loan by that date, the lender cashes your check. If you do not have the funds in your checking account to pay off your debt yet have overdraft protection through your bank, the check will clear, but you will owe your bank the full check amount, plus an overage fee. If you do not have overdraft protection, the check will bounce. Payday lenders often charge an additional fee if your check bounces.
Renewing Payday Loans
If you know ahead of time that you will not be able to pay off your payday loan when you receive your paycheck, you have the option to extend the loan for another term. Should you postpone repayment, the lender has the right to charge another service fee and apply interest to the debt until the next payment is due. Repeatedly extending your payday loans will result in you owing the lender considerable fees and interest charges -- sometimes more than the amount you originally borrowed. Payday loans are illegal in some states, such as New York, to protect consumers from falling dangerously into debt.
Nonpayment
You can only renew your payday loan a certain number of times. Each state has regulations regarding renewals. Once you reach the maximum payday loan extension, however, you must pay the loan. If you do not, the lender can file a lawsuit against you for nonpayment. In some states, this gives the payday lender the right to seize assets, such as wages, without your permission.
Payday Loan Alternatives
Because of the high interest and fees payday lenders charge, taking out a payday loan is risky business. The Federal Trade Commission recommends that consumers who need money consider applying for a small loan with their credit union or bank. Credit unions and banks are more likely to offer you a reasonable interest rate and more flexible payment terms. Credit card cash advances are yet another alternative to payday loans that you might consider. While credit card companies charge higher interest rates on cash advances than on regular purchases, the interest rate is sometimes lower than that of a payday lender. In addition, you can repay a credit card cash advance slowly over time rather than all at once.
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