Payday Loan

Sometimes called cash advances, these are very high-interest and very short-term loans, in which you're basically borrowing against your next paycheck. In some states, they're illegal. But hey, what happens in Maine stays in Maine.

And yes, ooooh. Hot shower time. You want to stay away from payday loans. If you are soooo strapped for cash that you need to borrow money to pay the rent, and you only have the promise of your future paycheck to borrow against, something has clearly gone wrong along the way.

A payday loan is a loan using the promise of delivery of cash on your payday check as collateral. And for most companies loaning money on payday, this is an extremely profitable business because they “only charge you 2%” for the loan. But let’s do the math. You’re getting the cash 2 weeks early. And, last time we looked at a calendar, there were 52 weeks in a year, or 26 bi-monthly pay periods.

So if they are charging you 2% to lend your money for one of those bi-monthly pay periods, the annualized rate the lending company is charging you for the pleasure of getting your payday 2 weeks earlier is 52% per year. Even the worst credit cards charge dramatically less than this rate of interest.

So how do payday loan places get away with such high rent on your hard-earned money? Well, if you have to borrow money in this form with such urgency, you are likely a very bad credit risk and the perceived odds of you simply vanishing are high. And the odds you are financially unsophisticated are, almost by definition, certain.

So if you ever find yourself needing a payday loan, let’s hope you can work a few long weekends, saving enough money so that you don’t need these things anymore. And next time, uh... stay in school.