Payday loan or cash advance may seem to be a simple solution for those in need of short term financing to avoid shortage of cash. But for consumers, getting out of payday loans isn't easy and most of them end up paying higher fees than the original amount borrowed.

How the loan works?
Most consumers request payday loans for a short time period of say 1 to 4 weeks. The loan is offered through cash and secured by a post dated check written by the borrower. The check includes the principal amount and additional charges including the interest.

On the maturity date, the borrower has to pay to pay back the loan in exchange of the check. The lender may also process the check traditionally or withdraw the required amount from the borrower's checking account. In case the borrower cannot repay the loan, the lender gives him the option to renew or roll over the loan.

Here's an example:
Robert was in need of cash to pay medical bills, so he borrowed $200 from a payday lender who charged $60 for up to 15 days. But he failed to pay off the loan within the scheduled time. So he rolled over the loan with another $60 fee for another 15 days. This went on and after 6 months, Robert has paid $720 in fees while he still owes the original $200.

This is the problem which most borrowers face in the payday loan industry. In most cases, the interest rates range from 300% to over 1000%. The rates tend to be more than 10 times higher than that of a small personal loan from the bank. They often go higher than that of a high interest rate credit card. Here is the recorded phone interview of a person who was charged at a rate of 1000% for payday loans.

Is payday loan the right choice?
No, Payday loan will never a right choice. Payday lenders do not check out for a borrower’s monthly expenses or does not find out if at all, the borrower can repay the loan. The lenders mainly target young borrowers who don’t understand the value of money, consumers unable to get out of debt and those who are unable to satisfy day-to-day financial needs.

Payday lending is considered to be a form of subprime lending. Payday lenders are regarded as loan sharks as they charge higher interest rates and hidden charges compared to other loans. Moreover, this industry is often involved in illegal practices thereby harassing consumers in need of money. Consequently, not all states allow for such lending practices. Hence, consumers should look for better saving strategies, prepare a well planned budget and choose alternative options rather than go for high-rate payday loans.