Why to Steer Clear of Payday Loans
Payday loans are meant as a stopgap for the fiscally pinched. But in many cases, these short-term loans create a costly cycle of escalating debt.</br></br>A payday loan is like a cash advance on your paycheck. Marketed as a temporary solution to a short-term setback like car repair or emergency medical issues, these loans are typically expected to be paid back in two weeks, the usual pay cycle.</br></br>But what happens, a recent study by the Pew Charitable Trusts found, is that most borrowers--some 69% of first-time borrowers--need the money not for a crisis but for everyday necessities. That leads to repeat loans.</br></br>"Payday loans are legalized loan sharking designed to get people into debt," says Kathleen Day, a spokeswoman for the Washington, D.C.-based Center for Responsible Lending. "Why would lending to someone in financial straits at outrageous interest rates be considered a good thing?"</br></br>Amy Cantu, a spokeswoman for the Community Financial Services Association of America, the industry's Alexandria, Va.-based trade group, responds that "consumers need a variety of credit options." Of the payday loan, she says: "We never said it was the right option for every consumer in every situation, but it definitely has a place."