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Debt consolidation

Payday Loan

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The headlines are true.  With minimal qualifications, you can walk out of a payday loan office with $500 only minutes after walking in.  If you are strapped for cash, it may sound like the perfect solution.  Get the cash now, worry with repayment later.  But fast cash comes with an enormous price.
Debt consolidation
A payday loan charges the highest interest seen on earth.  Even the loansharks in mobster movies might be considered lenient next to a PDL. For example, to borrow $100 from a payday loan office, you will be required to pay $120 in two weeks.  That's 20% interest, which sounds high, but maybe not so much different than high-interest credit cards.  But wait!  A credit card might charge 24% APR, but the PDL is charging 20% after two weeks.  That is equivalent to 500% over a year.
Debt consolidation
Renewing a payday loan.  Also called rolling-over, if you cannot pay the entire loan in two weeks, you can choose to pay just the interest.  Using our above example, you could pay the $20 interest charge, basically borrowing $100 for another two weeks.  Another $20 interest charge is due with the "new" $100 loan.  If you paid just the interest each two weeks for an entire year, you would have paid $500 and still owe the $100 balance.
Debt consolidation
Defaulting on a payday loan.  Do not default!  Exhaust all possible resources before you default on a payday loan.  When you default, the interest compounds.  That means if you fail to pay anything when the $120 is due in two weeks, interest now calculates on the whole $120, not just on the $100.  So in two more weeks you owe $144, after ten you would owe $300, and the effective rate escalates.  After a year of $100 compounded biweekly, you would owe over $11,000!
Debt consolidation
The obscene interest of payday loan companies should make you avoid their doors10/11/2006heir advertising makes the whole process seem so easy.  Remember, going into debt to a loanshark usually IS easy.  It's getting out that is so hard.  And while these loan agents may not have the knives and corkscrews of legendary mobsters, 500% interest, late fees, interest after maturity, and nonsufficient funds fees can be torturous tools all the same.