Payday loans must have been designed by Count Dracula, because chances are they will suck you dry. A 2014 report by the Consumer Financial Protection Board shines a light on the cryptic world of payday loans, where the obligation to pay often never dies. Garlic and a crucifix won't save you from payday loans, but we hope this article will.

What Are Payday Loans?

Payday loans, also called check loans and cash advances, are small-dollar, supposedly short-term loans that are secured by your next paycheck or government benefit. We say "supposedly" because in reality, these advances are often renewed so many times that they turn into long-term loans.

To qualify, you provide personal, financial, benefit and employment information. You must have a source of income like a job, Social Security or disability payments and pay back the loan, with interest, on the date you next get paid, which cannot be more than a month away. If you can't repay on time, you can roll over, or extend, the loan by paying extra fees. The one and only attraction of payday loans is that you can get one quickly even if you have a poor or non-existent credit rating.

Why Payday Loans Are Toxic

Many folks come to regret their involvement with payday loans. Here are eight reasons why you should avoid them at all costs:

  1. Payday loans must be paid back in full on the due date, unlike other loans that you pay off in affordable installments. The difficulty of paying off the entire loan at once leads to repeated, expensive loan rollovers.
  2. Payday loans charge usurious interest rates, with APRs commonly exceeding 300%. The average interest rate per biweekly loan is 15%. If you renewed the loan every other week for a year, you'd pay 26 x 15%, or a heart-stopping 360% per year. And this doesn't include the extra fees you must pay each time to roll over the loan.
  3. Fees may be much higher than average. ConsumerReports.org chronicles a $400 payday loan that charged $120 for a 16-day period, an APR of 684%. The consumer rolled over the loan five times and ended up paying $600 in fees, or 150% of the original loan amount. Only 15 states cap payday loan APRs below 60%.
  4. About 80% of payday loans are renewed or rolled over within two weeks. This means it is easy to fall behind on your debt, entering a debt trap that is hard to escape.
  5. About 60% of payday loan borrowers end up with fee expenses that exceed the amount borrowed. It takes about seven sequential rollovers for this to happen, and 60% of payday borrowers fall into this category.
  6. 84% of payday borrowers either renew a payday loan or default on it. If you default on the loan, you will be charged extra bank fees on top of the money you already owe.
  7. About 20% of payday loan borrowers who receive monthly benefits remain trapped in debt for a year or longer. This primarily affects the elderly and the disabled, that is, folks receiving government benefits.
  8. Many payday lenders do not quote accurate interest rates, trapping some unsuspecting borrowers in a nightmare of unending debt.

In short, payday loans are very expensive, often misrepresented and frequently create more problems than they solve.

We recommend you consider other sources of cash, such as savings, personal loans, secured loans, credit cards with 0% introductory APR offers, employer pay advances, a loan from a friend or family member and even to ask your creditors for more time to repay your debt.

Anything is better than falling into the payday-loan debt trap.