When Nancy needed $200 to pay bills, she borrowed it from a payday lender who charged her a fee of $38 for a two-week loan. On her next payday, she still couldn&8217;t meet her expenses and returned to the payday lender. She had to pay the $38 charge again to extend or &8220;roll over&8221; her loan for an additional two weeks. As the weeks went by, she returned to that lender 11 more times and saw the fees mount up. After six months, she had paid almost $500 in fees and still owed the original $200.

How They Work

Check cashers, pawn shops, gas stations, internet companies and others make small, short-term, and very high-interest-rate loans that go by a variety of names: payday loans, cash advance loans, check advance loans, postdated check loans or deferred-deposit check loans. Most often, you write a personal check payable to the lender for the amount you wish to borrow plus a fee. The check is dated for your next payday or another day within the next couple of weeks when you have to repay the loan. At that time you usually have three options: let the lender deposit your check automatically, pay the lender in cash equal to the amount of the check, or roll over the loan and pay the fee again.

While payday lenders make it easy to get the cash you need, try to avoid them. Their convenience comes at a very high price. The typical fee for a $100 two-week payday loan is $15. When figured over a year, that&8217;s a 391 percent annual percentage rate (APR). Compare that to the 18 percent APR of the average credit card.

Consider the Risks

A payday loan costs at least ten times as much as a small loan from a traditional bank. You may end up paying an APR of 300, 400 or even 1,000 percent.

If your check to the payday lender bounces, both the bank and your lender may charge you bounced check fees. In some states, a payday lender might threaten you with prosecution for writing a &8220;hot&8221; check (even though the lender knew that you didn&8217;t have enough money in your account when it accepted your check). If you can&8217;t repay the loan and the fee on the due date, you may get trapped in an endless cycle of debt: you are never able to pay off the loan, but you are repaying the loan fee over and over. Payday loan customers average more than 10 loans per year.

Like Nancy, you may end up paying much more in fees than the amount you borrowed originally.

Dr. Marvin Copes is Education/Community Service Volunteer for AARP Alabama in Maylene. He can be reached by e-mail at mailto:mlcopes@charter.net