What You Should Know 

Check cashers, pawn shops, gas stations, Internet companies and others make small, short-term, and very high-interest-rate loans that go by a variety of names: "payday loans," "cash advance loans," "check advance loans," postdated check loans," or "deferred-deposit check loans." Most often, you write a personal check payable to the lender for the amount you wish to borrow plus a fee. The check is dated for your next payday or another day within the next couple of weeks when you have to repay the loan. At that time you usually have three options: let the lender deposit your check automatically, pay the lender in cash equal to the amount of the check, or roll over the loan and pay the fee again. 

While payday lenders make it easy to get the cash you need, try to avoid them. Their convenience comes at a very high price. The typical fee for a $100 two-week payday loan is $15. When figured over a year, that's a 391% annual percentage rate (APR). Compare that to the 18% APR of the average credit card. 

The bottom line: Before getting a high-interest loan from a payday lender, consider other options. 

Consider the Risks 

A payday loan costs at least ten times as much as a small loan from a traditional bank. You may end up paying an APR of 300%, 400% or even 1,000%. 

If your check to the payday lender bounces, both the bank and your lender may charge you bounced check fees. In some states, a payday lender might threaten you with prosecution for writing a "hot" check (even though the lender knew that you didn't have enough money in your account when it accepted your check). 

If you can't repay the loan and the fee on the due date, you may get trapped in an endless cycle of debt: you are never able to pay off the loan, but you are repaying the loan fee over and over. Payday loan customers average more than 10 loans per year. Like Nancy, you may end up paying much more in fees than the amount you borrowed originally. 

Alternatives to Payday Loans 

Contact your creditors to see if they will give you more time to pay your bills. That way you can pay them when you have the funds available. 

Borrow from a friend or family member. 

If a loan is unavoidable, shop around. Although payday loans may be the only option for certain borrowers with poor credit, you may be able to find a bank or credit union that will approve a small loan with a reasonable interest rate. Compare both the APR and the dollar amount of the finance charge. 

Consider getting overdraft protection on your bank account. You will avoid returned check fees and have a cushion in financial emergencies. 

If you own a credit card, try taking a small cash advance. 

Preventing Financial Emergencies 

If you find you are just a little short of cash each month or can't pay unexpected bills, take a hard look at your income and expenses. Is there any way that you can develop a modest savings plan? If you track where you spend your money, you may find ways to save. Are there some purchases you don't have to make? 

With just $300 in a savings account, you may be able to handle a financial emergency without going to a payday lender. In addition to avoiding high payday loan fees, you will be able to earn interest on your money until you need it. 

If you need help preparing a budget, you can get it from a nonprofit credit-counseling agency or cooperative extension agent in your area. Check your telephone company's yellow pages under "Credit and Debt Counseling Services." 

For More Information 

Consumer Reports Online
The online edition of Consumer Reports has free reports of interest to consumers. Its "Money" section includes articles on credit-counseling services, check cashing, and credit reports. Because all credit-counseling agencies are not the same, the report under "Credit-counseling services" with its link to "What to ask before signing up" is especially helpful.
URL: http://www.consumerreports.org

National Foundation for Credit Counseling (NFCC)
The NFCC is a nationwide network of nonprofit budget and debt-counseling agencies. The agencies provide educational programs and individual counseling in-person, by phone, or by mail. They teach basic money management skills and assist in resolving debt problems. Consumers may obtain counseling services at no cost or for a low fee.
URL: http://www.nfcc.org