When you're strapped for cash and faced with an unexpected expense, an online payday loan might seem like a lifesaver. A search-engine query for payday lenders returns many pages of loan companies seemingly eager to fork over the money you need. Before coughing up your bank account routing information and Social Security number, however, be aware of the scams inherent in a large percentage of these websites. Even if you land on a legitimate payday lender, the terms are almost never to your advantage, and there are better methods for raising money when you're in a pinch.

How Payday Loans Work

A payday loan is a short-term loan. You receive cash in exchange for writing a postdated check to the lender, usually dated for your next payday. The check covers the loan amount plus the finance charge. For example, if you are borrowing $100, the lender might require a postdated check for $115, the extra $15 representing the finance charge. If all goes well and you suffer no further financial setback before payday, the lender cashes your check on that date and the loan is settled.

Unfortunately, many customers are unable to pay back the loan in full by its due date. After failure to pay, borrowers report receiving threatening phone calls and letters, and being charged extraordinarily high interest charges. Payday lenders use collection tactics that are considered aggressive compared to other types of lenders.

Payday Loan Website Scams

Standard payday loans are not ideal, but they are at least a legitimate method to procure cash in a desperate situation. However, many of the websites ostensibly offering payday loans are nothing more than thinly veiled scams designed to extract your personal information, including your bank account number and Social Security number. Once they have this information, the charlatans behind a questionable payday loan site often use it to enroll you in costly services, such as credit monitoring or online subscription services. Unfortunately, many of these schemes are technically legal, since the fine print uses arcane legal language to explain what is going to happen.

The most nefarious fake payday loan websites take it a step further and engage in outright identity theft. If you're already struggling financially, the time and costs involved in rectifying such a situation can be a lot to bear.

Hefty Fees for Payday Loans

Even legitimate payday lenders impose hefty rates and fees on consumers. Returning to the example above, a $15 finance charge on a $100 loan may not sound like much, but assuming that the loan term is two weeks or less, which is typical for a payday loan, the finance charge of $15 on $100 represents an annual percentage rate (APR) of greater than 300%. This rate is more than 10 times higher than even the worst credit card terms out there.

The terms get more usurious if you fail to pay back the loan on its due date, or if the postdated check that you wrote does not clear the bank. The best-case scenario is that the payday lender rolls your loan over for another two weeks, assessing another $15 finance charge. Now your total interest is $30 on a $100 loan with a term of less than four weeks. Most payday lenders tack on late fees and penalties, which can quickly bring the amount you owe to double or more than what you borrowed in the first place.

Better Options for Struggling Consumers

If you need a few hundred dollars for a car repair or unexpected medical expense, and payday is a week or two away, a payday lender should be a lender of last resort. Better options include selling personal items that you no longer need, asking your employer for an advance on your paycheck (many employers are willing to do this on occasion, particularly if you are a tenured employee), or appealing to a friend or family member for a short-term loan.

Even a credit card, which typically carries an APR that ranges from under 10% for top-credit borrowers to 29% for less credit-worthy customers, is a much cheaper source of funds than a payday loan. Most credit cards charge no interest at all if you pay them off within 30 days. Consequently, a two-week $100 loan that would cost you $15 or more with a payday lender is free with a credit card.

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