In the last post, I talked about the high finance charges that payday lenders impose on credit-challenged consumers. Essentially, for every $1,000 you borrow from a cash advance lender, you’ll have to cough up $1,250 a couple of weeks later.

What could you have done with that extra $250? You could have paid down a credit card, made a car payment or paid a utility bill or two. Or you could have treated yourself to a nice dinner out, and banked the rest for a future cash emergency.

That’s assuming you even have the $1,250 two weeks from now.

After all, when you take out a payday loan, you’re really taking a gamble on:

a) having the money to pay the loan amount plus the finance charges, and

b) not having extra expenses crop up in the next two weeks.

After all, life can be pretty unpredictable. That’s why you needed the cash advance in the first place, right? Can you realistically tell yourself that you won’t hit another financial bump in the road before your loan becomes due?

Now, if ridiculous finance charges aren’t enough, it gets worse.

Payday Loan Cash Advance Extension

What happens when it comes time to pay back the loan, and you don’t have the money in the bank to cover it?

Most payday lenders will graciously allow you to extend the loan for another two weeks – that is, they’ll give you extra time to pay it back. They’re big-hearted folks, after all, and they certainly don’t want to see you stress out about repaying a loan.

(What was that smell?)

Uh, right. They’ll charge you another 25% or so for the privilege of extending your loan. So now, instead of paying $1,250 for borrowing $1,000, you’ll pay $1,500. But hey, you bought yourself another two weeks, right?

Let’s say that two weeks later (four weeks after you took out the loan), things aren’t going any better. Then what? Yep, another extension, another $250.

Bad credit cash advance lenders will typically allow three extensions. So if you exhaust all of your extensions, you’ll end up owing double the amount of the original loan. Sticking with our example, you now owe $2,000 for having borrowed $1,000 two weeks ago.

Handle Payday Loans Cautiously

It would be rather thoughtless of me to tell you not to take out a cash advance under any circumstance. There are, of course, times when there are no other option.

I’d avoid it if at all possible. Call your utility company, credit card lender or whomever and explain your situation, plan your grocery list more carefully or ask a family member for help (I realize that last one comes with its own complications, but most family members won’t charge you 25% interest). Just thoroughly evaluate all other options first.

If there are no other options, plan out how you’ll get the money to pay the loan without taking an extension. You may need to use those two weeks to sell some stuff on eBay, do some moonlighting or hold the mother of all garage sales. Whatever it is, figure it out before you sign the loan paperwork. You’ll save yourself a ton of stress a couple of weeks from now.

-Mike