One of the effects of the bad economy is that banks have tightened their lending policies making loans harder and harder to get.  Combine that with someone living paycheck to paycheck, facing a reduction of overtime and salary, but not a reduction in living expenses, and you have a recipe for desperation.

Many of my clients come to me having taken out a "payday loan," and I am shocked at the terms I see.  I thought credit card interest rates were bad; "payday loans" are far worse.  In my opinion, they are a poor solution to the problem, and I recommend that my clients avoid them at all costs.

What is a Payday Loan?

A "payday loan" is just that, an advancement on your paycheck when you are in a cash flow crunch.  You borrow the money now, then pay it back when you get your next paycheck.  According to an article in US News and World Report, interest on the loan is typically between $15 and $17 per $100 borrowed.

Sound not too bad, until you realize that at $15, the APR is 390%!  Not exactly a great deal!  If you Google "payday loans in NJ," you will find several outfits that provide this service.  However, not all of them are that forthcoming about what they charge in interest.  Check out an outfit called Instant Loan and click to see what the rates and terms are.  You will see this.

In addition, with these interest rates, the loans have a tendency to perpetuate the problem.  Money is so tight that once you pay off the loan, the interest paid creates an even bigger gap between income and expenses, and you get another loan to tide you over.  This tends to make these loans a vicious cycle.  The article proposes some alternatives, though.

"[C]onsumer groups say there are other options. . . . [I]nstead of turning to payday loans, cash-strapped workers can negotiate payment plans with their creditors, schedule their bills so that they are due after instead of right before paychecks arrive, or even make payments late if the charges associated with doing so are less than the interest on the loans."

Let's say you need $400 now to make your car payment on time.  The interest, at $15 per $100, would be $60 ($68 at $17).  Is that more, or less, than the late fee on the car loan if you paid it after getting your next paycheck?

What You Should Do

My advice is, if you are facing a major crimp in your cash flow, there are a lot of better alternatives to the "payday loan."  Avoid them at all costs, only considering them as a last resort.  You will be better off in the long run.

If your debt situation goes beyond one or two creditors, however, and you are wondering whether you need a solution to a bigger problem, then download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in New Jersey to find out if bankruptcy might be the solution.

If you are a southern New Jersey resident in bad financial straits with unmanageable debt, you can also call my office at 856-432-4113 or contact me through this site to schedule an appointment to discuss bankruptcy as a possible solution to your financial problems.

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Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.