Beware the High Cost of Payday Loans

As a small business owner, I know how tight cash can be at times.  Many small business owners turn to credit cards and other sources for short term loans when business is slow and cash is tight. 

I’ve noticed that payday loan stores have been popping up in my area lately, so I thought I’d do some research to find out how these places work.  Here’s what I found out…

First, if you’re not familiar with payday loans, basically, they are short-term loans, usually in small amounts.  Typically, you write a check for the amount of the loan plus fees, and the lender cashes the check on a specified date, usually one to four weeks later.

Here’s an example: you need $100 to pay your bills so you borrow $100 from a payday loan company.  You write a check for $115 and leave it with the lender, to be cashed in two weeks.  Your fee for that loan is $15 - that is an annual percentage rate (APR) of 391%. 

Although the Truth in Lending Act requires lenders to disclose the finance charge, including the APR, many consumers do not understand the true cost of a payday loan.  To continue the example above, let’s assume that you can’t pay the $115 when it comes due.  The lender allows you to roll the loan over for another two weeks, but you pay another fee each time you do this.  If you rollover the loan in the example above three times, your total finance charges would be $60, for a $100 loan.  That equates to an APR of more than 1000%!

As you can see from the example this a very costly way to borrow, even when compared to high interest credit cards.  So, if business is slow and cash is tight, here are some much more affordable alternatives to consider: a business loan, a personal loan from a bank or credit union, a personal loan from family or friends, or even a cash advance against your credit card.