There is a monster lurking out in the credit world. You may think that I am talking about the big credit card companies, but sadly, no. Since I am in a dinosaur mood, I'm going to see if I can completely mess-up this analogy: The big credit card companies are represented by the T-Rex and the part of the Velociraptor is played by the Payday loan. They hunt in packs (you see them on almost every street corner), they are relentless in their attack (the lure of easy money, fast), and they totally devour their prey (high interest rates).
I realize that there may come a time when there is no choice but to get a loan from one of these places, but please be aware that you may be opening a door to a certain lady's box. For example, let's say that you need to borrow $200. You go down to your local Loan store and get your money, what could be easier? Well, depending on the company you choose, you will be paying anywhere from $41.00 to $50.00 for the privilege of borrowing that money for 14 days. Now, on first glance that may not seem like a great deal of money, but just take a minute and have a look at the interest rate you are paying: anywhere from 430.18% to 573.57% APR (roughly 21-25% for the 14-day loan).1I don't know about you, but I find that a trifle high. With those type of rates, I am half expecting someone to drop by and break my legs if my payment is late.
I took a look at three of these companies and the only one that offered the lower rate, $41.00, was MoneyTree. All the others used a rate of 25% for the 14 day loan period. At the end of the term, you pay the company $250 and you are done. But, let's say that you just can't pay them at the end of the 14 days, what can you do? Well, you pay them $50 (your interest) and they will extend the term of your loan for an additional 14 days. At the end of that period, you pay them $250. So, for the $200 you borrowed, you have paid $100, or 50% of the original loan. If you are already on a tight budget, how will you be able to come up with the extra $50-$100? Does this seem worth it to you? Can you see where this can become a vicious cycle?
This cycle has become so dangerous, that the Federal government has even joined the party. "On October 1, 2007, a new federal law became effective that severely limits the terms under which we can loan to active duty members of the military and their spouses and dependents. As a result, after this date we will no longer be able to offer payday loans to our military customers."2 Now, if they get involved, you know that there is something to be concerned about.
I realize that in this age of tight budgets and little disposable income, there is a real temptation to get cash, fast; It's easy and convenient, but at a price. I know from experience (I fell into this money pit about 7 years ago) the type of trouble you can get into by using these services, so PLEASE think it through and be very careful.
1moneytreeinc.com (dead link removed)
2moneytreeinc.com (dead link removed)