Fast Cash Loans Mean Long-Term Debt

If your email in-box is anything like mine, it's crammed with messages with subject lines like "Your Christmas Bonus, deposit this afternoon." Says another: "Can't wait for your next paycheck? You can get up to 1500 in your account with 100 days to pay it back."

If you're a cash-strapped consumer struggling to get to the end of your holiday shopping list, these offers may sound tempting, but beware! They are payday loans, plain and simple - notorious predatory loans that victimize working men and women and members of the military.

What payday lenders don't advertise is the enormous cost of taking out their loans, characterized by annual percentage rates that often exceed 250 percent. Many payday lenders, especially those operating on the Internet, are of dubious legality. They may not be licensed and may be blatantly violating federal and state consumer protection laws.

A few years back, one prominent payday lender advertised that its loans were "better than borrowing from your mother." That brought a spirited response from Illinois Attorney General Lisa Madigan.

"The reality is that these loans will take the shirt right off your back with costly fees and outrageous interest rates," Madigan said.

A payday loan, very simply, is a short-term loan obtained when a borrower writes a check dated in the future. To get a loan, a borrower must show the payday lender a pay stub and then write the lender a check for the cash loan. The check is usually made out for a later date -- often one month and one day after the date of the loan. The lender gives the borrower cash in return, but for an amount less than the value of the check.

The difference between the amount for which the consumer writes the check and the amount the consumer is paid in cash is the lender's profit, or finance charge. Payday lenders often charge between $15 and $50 for every $90 borrowed, which only covers the few short weeks of the loan term. After that, the consumer must pay the lender back or pay the lender even more in finance charges.

Most of the time, a consumer doesn't have the funds in his or her checking account to cover the post-dated check when it is written, and may not have the funds when it comes time for the check to be cashed. When payment comes due, if consumers can't cover the check, they are often encouraged to roll the overdue loan into a new loan, incurring new fees and increasing the amount of the loan.

This loan "flipping" easily can lead to the consumer using most or all of the money borrowed to pay the lender's costly fees.

Think we're exaggerating? Consider the experience of Janet of Burnsville, NC, who wrote to ConsumerAffairs.com last August.

"I applied for a loan of 100 online like a dummy. I was desperate I had NO FOOD. I agreed to pay back $125.00 in 2 payments that would be taken out of my checking account. I only rec $75.00 but I at least was able to buy food. Yesterday I learned that $315.00 was trying to be taken out of my checking account over and over and over. It had incurred several NSF charges."

Not only are payday loans likely to result in such unforeseen headaches as overdrawn checking accounts and ruinously high payback schedules, they're also likely to lead to bankruptcy.

"Our research finds that payday loans and their interest payments may be sufficient to tip the balance into bankruptcy for a population that is already severely financially stressed," said Marta Skiba of Vanderbilt Law School who conducted a 2008 study into payday loans.

The researchers found that first-time applicants who received a payday loan were almost twice as likely to file for bankruptcy within two years as those denied the first time. The interest from payday and pawn loans amounted to about 11 percent of the total liquid debt interest burden at the time of the bankruptcy filing.

So what should you do if you're desperately short of money and unable to pay for essentials? The answer varies from one city to another, but a good place to start is the nearest Salvation Army office, homeless shelter or food pantry. While the staff and volunteers may not be able to loan or give you money, they can direct you to local charities who will help you rather than take advantage of your plight.