A payday loan lets you borrow money until you receive your next paycheck. If you borrow $100 today from a payday lender and have to pay back $120 in two weeks, you might think “well, $20 isn’t all that much since I need the money today.” But $20 over a two week period is a 520% APR! And what if you need another payday loan to pay off the $120? Things can get out of control in a hurry, and you can find yourself getting sunk by all of this debt.

When you take out a payday loan, you generally give the lender a post-dated check or debit authorization . A post-dated check is a check with a future date that the lender promises not to cash until the date written on the check. The loan is given for a short period, usually 2-3 weeks to coincide with your next payday, for a fee. The lender holds off on cashing the check or initiating the debit until that date. If you can’t repay the loan in two weeks (which frequently occurs) the lender will rollover or extend the loan for an additional fee. At that time, you can either pay the check with cash, allow the lender to deposit the check or rollover the loan by paying another fee.

The payday loan is easy to get: there is no credit check, you can walk in to a store and walk out with your money or you can even get it by calling a 1-800 number or visiting a website. But remember that the consequences can be huge.

Payday loans can be very expensive. Almost any other form of borrowing money is less costly. Their loan approval process is easy, but you are likely borrowing against money you haven’t earned yet. People often use payday loans for emergencies. Sometimes these are the only option available.

Below is a cost comparison for different loans:

As you can see, even though getting a loan from a pawnshop, a payday lender, or a rent-to-own store might be easy, you can end up paying as much as 500 percent more than you would for a loan from a bank or credit union or even a credit card.

Marisol’s Story About Payday Loans

When Marisol Martinez went to Chicago’s NorthSide Community Federal Credit Union in November 2001, she had seven payday loans with outstanding totals of nearly $2,900. Since the summer she had paid over $3,000 in interest without any decrease in prinicipal. An hour after she visited the credit union, Ms. Martinez had a loan to help her escape the payday loan trap. Instead of paying 521% to 574% interest on her payday loans, she was paying 9.75% to NorthSide. Her total interest of $89 over six months was only slightly more than what her payday loans would have charged her for two weeks.