Lets face it, most people who turn to a payday lender for a loan are scared.

Despite the stock market’s recent rally, the overall economy and job market are still quite foreboding. Many people feel like they have no other option for short term financing. They need money right away, have poor credit, or don’t want to hassle with other options.

The result: a high interest rate loan from a payday lender.
 
According to the Community Financial Services Association of America (CFSA), more than 22,000 payday advance locations across the United States extend approximately billions in short-term loans to millions of people each year. To give you a simple comparison, Starbucks has over 16,000 locations worldwide and McDonald's has 32,000 stores. And, in many states, payday advances are actually illegal or deterred due to usury laws.

When a customer receives a payday loan, he or she writes a check for the amount of the loan and a finance charge. The lender agrees not to cash the check until the customer’s next payday (typically every two weeks for most Americans). Payday lenders will then provide the check-writer with $50 to $500 in the meantime.

Payday lenders have often been vilified in the media for high fees and effective interest rates. Most payday loans have a typical fee of $17.50 per $100 borrowed. So, for example, current law allows lenders to charge 15% of the face amount borrowed which must also include the fee for the loan. So, in order to borrow a net amount of $100, the consumer must write a check for $117.62 ($117.625 x .85 = $100). Most lenders simply round off the $17.62 interest fee amount to $17.50.

The real shock to borrowers comes from understanding the interest rate you are charged. While on the surface it seems like you are only paying the equivalent to 15% interest on your loan ($17.50 on every $100 loaned), people tend to forget that the loans only typically last for two weeks and must be repaid on your next payday. The annual interest rate for most payday loans is equivalent to a staggering 456% APR for the two-week loan if it was rolled over and carried out on an annual basis. (Unfortunately, bank overdraft fees have started giving these rates a run for their money.)

Many critics of the financing say that payday loans are not like business or home loans because payday loan agencies do not evaluate a person’s cost of living or ability to afford the payments when loaning them money. Lenders give a borrower two weeks to repay the loan - often impractical and most customers cannot fulfill. Moreover, borrowers who cannot repay the loan may choose to roll it over several times and pile on even more debt.

Other options for cheaper small loans…

• Pawn Shops: Borrowers can receive money against any item of value from a pawn shop. You leave the goods as collateral for repayment of a loan in a few months. The average loan is $80 and includes a small interest fee. If you do not return to pay off your loan, you simply lose your collateral.
• Peer-to-Peer Lending: Peer lending services, like Prosper or Lending Club, let individuals to loan money to one another without a bank. Often times, peer-to-peer loans allow you to get better interest rates than those offered by traditional banks. These websites can also allow your family members to loan you money through a more formal structure with written contracts.
• Personal Loans From A Bank: Many banks have tried to mitigate the risk of its customers using payday lenders. For example, the NC State Employees' Credit Union (SECU) offers short-term loans that have a 12% annual interest rate, a maximum limit of $500, requires you to repay via direct deposit, and puts 5% of loan proceeds in savings accounts to end the paycheck to paycheck cycle.
• Car Title Lenders: These lenders allow applicants to borrow money against their car title. If you own a vehicle that is paid off, title lenders can give you a personal loan of about $500 with interest rates starting as low as 3% per month in some cases.
• Credit Cards: While entering into more debt with credit cards is not a viable cash flow option for long, using your credit card with an annual interest rate of even 22% or more may be a better short term financial decision if you are desperate for money to pay a bill. High credit card interest rates are still a better alternative than payday lenders’ huge fees and rates.

There are other options available to borrowers instead of accepting a high interest rate loan from a payday lender. Some of these options are an “out of the box” way of thinking about your cash flow problem, but these alternatives show that there is no reason to accept unfavorable loan terms.

There are other options.

With some knowledge and some leg work, you can find that little bit of extra cash when you need it the most.