By Bill Pratt
22 October 2008

Unfortunately, the title is not a typo. There are people out there paying interest rates of 600% or more. Who charges such outrageous interest rates? Are they even legal?

They come in the form of payday loans and, yes, they are legal.  |

Actually, they come in a variety of high-interest flavors: payday loans, check advance cashing, car title loans, and so forth. They allow you to borrow money against something (your next paycheck, your car title) and they charge fees that are so high, relative to what you get in return, that the equivalent interest rate would be as high as 600%.

For example, if you get a $1,000 payday loan on Friday because your next paycheck is not until next Friday, you can expect to pay a substantial fee of 10% or $100. That’s a $100 fee for borrowing against your next paycheck for just one week. A loan of 10% for one week, projected out for 52 weeks is equivalent to paying 520% interest!

According to the Consumers Union (the nonprofit publisher of Consumer Reports) in California, Payday Loan companies can charge as much as 15% of the face value of the check. That equates to about 900% for a one-week loan and 450% for a two-week loan. To compound the issues, a Wall Street analyst indicated, "the average customer makes 11 transactions a year,” compounding their problem and their financial woes.

These loans are targeted for people that do not have access to conventional credit, such as credit cards, personal loans, etc. If you have been reading my articles, you can see how dangerous debt is to your future, so you have to ask yourself why you need this money so fast? The commercials show people getting these loans to take extravagant vacations and enjoying other luxuries. If you don’t have money and you don’t even have access to regular credit, clearly now is not the time to start enjoying luxuries.

You should instead start to build a cash reserve or start to establish a credit history if you so desire. You can find several ideas for establishing credit in Build Credit so You Can Borrow.

Your goal should be to stop the cycle of spending before you earn, and then to start a little cash reserve so you can handle small emergencies, such as car repairs or medical expenses, which are two of the biggest categories that put people over the edge financially. Once you set up an emergency fund, you will be well on your way to breaking the debt cycle for good. Next time a cash advance commercial comes on, you can use that time to run to the restroom instead of running for a pen and pad of paper.

See if you qualify for a credit card.

Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com.