Cash advance loans (also known as payday loans) are relatively easy to obtain. These types of loans do not require a credit check, and the borrower receives the cash immediately upon providing proof of employment, showing a bank statement, and writing a post-dated check to the lender.
These types of loans are small amounts that the borrower can pay back when he receives his next paycheck. Therefore, most cash advance loans do not exceed a few hundred dollars.
The Price Tag of Easy Money
While cash advance loans are quick and convenient, they are not cheap. Expect to pay 15 to 30 percent more than the loan amount in order to use this service. For example, if you need to borrow $100, you could end up paying $130 total if you pay in full when you receive your next paycheck. Failure to pay the loan on time will cost even more.
Payday loans are a tremendous bargain – for the lender. They are essentially buying $130 for $100. Since selling hard-earned money at a discount is a guaranteed way to go bankrupt, cash advance loans should only be used as a last resort.
The Cycle of Debt
Cash advance loans often compound the financial woes of people struggling to manage their money. If someone takes a cash advance loan because he has spent all his available cash, he will receive immediate cash, but it will become harder to pay his bills over his next pay period. If he rolls his loan over to the next payday, he will rack up even more loan fees. If he pays his loan off in full, he will have less money to make it through that pay period, thus increasing his likelihood for seeking yet another payday loan. Until he identifies the root cause of his situation and develops a plan to get his finances under control, he will only create more trouble for himself.
The old adage “an ounce of prevention is worth a pound of cure” certainly applies to money. Taking steps to prevent the need for a cash advance loan can save a great deal of money in the long run. One of the best ways to protect yourself from unforeseen circumstances is to save up an emergency fund.
If you have already taken a cash advance loan or you have no other choice but to do so, develop a plan for paying it off and getting back on your feet. You may have to sell an item of value or drastically cut expenses for the next month or so, but it is vital that you pay off the loan quickly.