Payday loans are a way to get money today at a high rate of interest. They are quick and easy to get, but are costly.

Payday loans are often offered to borrowers who have no other means of getting credit. Perhaps you’ve experienced a bankruptcy or are in a time of financial hardship. If you’re considering a payday loan, chances are your credit score is low and you are in a tough situation. This article will educate you as to the ins and outs of how a payday loan actually works so you can make sure not to get trapped by the potential pitfalls of using one of these loans.

Getting a payday loan goes something like this: You visit a lender and write a personal check for a certain amount of money. This is the amount you want to borrow plus whatever interest rate or fee they are going to charge you for borrowing the money. Usually these rates are very high – like 20%.

For this example, let’s say you need $500, so you write the check to the lender for $600 (the $500 you need to borrow, plus the 20% fee they charge you to borrow the $500.) The lender hands you $500 in cash. You are free to use that money as you please.

In two weeks (thus the term “payday” – since most people are paid every two weeks – the idea being that you needed an advance to hold you over until your next payday) you owe the lender the $600. If you have the money (which remember, is more than you borrowed in the first place), you pay up and everything is good.

But what if you don’t have the $600? Then you need another loan. The lender will usually roll over the loan for another fee (of course, you can only do this so many times before they will insist you pay up) – maybe another 10% on top of what you owed (this amount is not unusual.) Now you owe $650 on the $500 you borrowed! If you extend the loan again, the lender may roll the loan over once more for another fee. By the time you pay the loan off, you may pay anywhere from a 20%-40% interest rate on that loan!

Unfortunately, it’s only those who already have a bad credit situation who get taken in by these kinds of loans. If you are in a desperate situation, make sure you do not get caught up in the cycle of having to roll the loan over repeatedly. A payday loan is an expensive way to get credit, and while it can help you in a pinch or an emergency, it isn’t a wise way to get credit on a regular basis. If you do accept a payday loan, make sure you use the borrowed money wisely and can pay back the entire loan – plus the fee – on time so you don’t get penalized with a humongous fee.