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Why Payday Loans Are Bad News

July 11th, 2011, byMichelle Singletary

Q: I have five payday loans and can no longer afford the interest payments every two weeks on the loans. I had a plan; however, I made a costly mistake, and the plan went down the drain. Help. What can be done?

A: For our readers who don’t know what a payday loan is, you are very fortunate.

Payday loans are small, short-term, high-interest-rate loans, typically of a few hundred dollars. When borrowers get a payday loan, they promise to repay the debt out of their next paycheck, usually in two weeks. They typically are required to give the lender a post-dated personal check for the amount borrowed, plus the loan fee. Or, more likely, they authorize the lender to withdraw the funds electronically from their bank account. If the loan isn’t repaid on time, he or she is often allowed to roll over the loan for additional fees.

Payday loans are one of the worst ways to get out of a financial jam. Think about it. If you can’t pay your bills now with the paycheck you have, how will you dig out of this hole by promising parts of your next paycheck? You end up always behind.

What you shouldn’t do is go for the hype from for-profit companies that claim they can help you out of this mess.

Instead, try to negotiate with the payday lenders for an extended payment plan. If you can’t work something out, look for a nonprofit consumer credit counseling service at the National Foundation for Credit Counseling’s Web site.

And most importantly, don’t ever take out another payday loan.

Last modified: July 11, 2011 at 1:13 pm