So, you’re a little short on cash this month and are thinking about getting a payday loan to help you through the next week until your payday. Before you sign on the dotted line and get a payday loan, make sure know what you're signing up for. This article will discuss the basics of payday loans so that you can make an educated decision.

If you watch TV, listen to the radio or drive down the road, odds are you’ve heard of payday loans. These loans are short term loans that can help you get through a rough time. You’re just a little short on the bills this month and need a little extra cash, but payday isn’t until next week, what do you do? A lot of people turn to payday loans.

The purpose of this article isn’t to tell you to use or not use payday loans. The purpose is to simply help you understand the costs and risks associated with these loans so you can make the best decision for you.

What is it?

A payday loan is a small loan that you can use if you temporarily run out of money. Most of these loans are really short term loans, one or two weeks, and fairly low, a couple hundred bucks or so. To get a payday loan, you’ll typically write a check out to the payday loan lender for the amount you are borrowing, plus a fee. You’ll leave the check with your lender and they will cash it when you are ready to pay it.

When the loan comes due, if you can’t pay it back, you can ‘roll it over’ and extend it. You don’t have to repay it, but you will accumulate more fees.

How much does it cost?

Most payday loans are pretty expensive. It may not seem like much, but when you compare the APR (annual percentage rate) or payday loans to a typical loan, you’ll find the rate is usually in the hundreds of percent … we’re talking 400-500% APR. You’ll usually pay $15-$20 fee for a $100 loan for two weeks. Sure $15 doesn’t seem like much, but it adds up fast.

What’s the risk?

The biggest problem with payday loans is that they don’t really help you overcome the problem … your spending is greater than your income. (Not so good with your money? Maybe you should try some budgeting software.)

If you’re struggling financially, payday loans have the potential of making your problems much worse. You end up paying a really high interest rate, which means you’ve just upped your expenses.

If you’re using payday loans as a short term strategy, you’re probably okay. Say your car broke down and you need a little cash for the repair so you can go to work and make a living. Using these loans once or twice is probably okay. But if you’re using payday loans as a long term financial strategy, know they will completely pull you under.

Are there any alternatives?

Sure payday loans are a quick fix, but is that really your only option? Take a look at some of these alternative solutions.

  • Build up an emergency cash fund. Yes, I realize this is easier said than done.
  • Build up your credit. If you’ve got a good line of credit, you can borrow, in moderation, from your bank or credit union … and they have much lower rates.
  • Keep an open, unused credit card for emergency expenses. The trick is not using for anything but an actual emergency. And that new pair of shoes on sale at Dillards is not an emergency!
  • Get a signature loan (also called unsecured loan) from your credit union.
  • Get a part time job to earn some extra cash.
  • Check into loan modification and try to negotiate a payment plan with your lender.
  • Invest in overdraft protection on your checking account.

Payday loans aren’t bad if you use them properly. In fact, payday loans are often less expensive than paying bounced check fees and for overdraft protection. Sometimes they really are the quickest and easiest way to get money quick. Just make sure you do your homework before you sign on the dotted line.