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What It Really Costs to Use Payday Loans for Holiday Shopping

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There’s perhaps no other time of year when we are so acutely aware of how tight our budgets are. It’s easy to get caught up in the excitement and expectations of gift giving and socializing, even when there’s not enough room in the bank account to splurge.

As a result, some people go into debt during the holidays. Some turn to credit cards when they’re short on cash, even though going into credit card debt can be expensive and have an unintended and unwanted impact on your credit. Though credit card debt has negative consequences, there are worse holiday-debt scenarios. For people who don’t have credit cards at their disposal, it’s easy to see how a short-term, small-dollar loan might be appealing: Borrow enough to get some gifts before Christmas, and cover that loan as soon as your next paycheck comes. Payday lenders are advertising their products as a way to make the season less stressful, but many researchers and consumer advocates argue payday loans are often anything but stress-free.

A 2013 series of reports from the Pew Charitable Trusts explored who borrows payday loans, why they borrow them and how they repay them. According to that research, payday loan borrowers see the products as the solution to many problems: Not only do they get cash quickly, they do it without going into long-term debt or needing to ask friends or family for money. The Pew Charitable Trusts researchers found that only 14% of payday loan borrowers can afford to repay the balance when it comes due, generally about two weeks after it was first borrowed. To pay off the loan, 41% needed an infusion of cash, like pawning a personal possession, getting a tax refund or asking a friend or family for help — options that are generally available before the person takes out the payday loan.

The typical payday loan hardly resembles a quick fix. The average borrower is in debt for 212 days, according to the Center for Responsible Lending, bringing the cost of $325 loan to about $793 by the time the borrower pays it off.

At the same time, a majority of payday loan borrowers say the loans provide relief, which conflicts with the frustration they feel when trying to repay them, according to the Pew Charitable Trusts. For people constantly struggling to make ends meet (58% of payday loan borrowers, the Pew report says), it’s understandable that the pressure of the holidays may increase the appeal of short-term loans. However, using a payday loan to relieve that stress seems more likely to drag out into a long-term, expensive problem.

There are some alternatives for payday loans you may want to consider if you’re worried you won’t be able to pay up when your loan comes due. Since payday loans don’t require a credit check, they’re favored among consumers with bad credit or no credit history. You can check your credit scores for free every month on Credit.com to see where you stand and track your credit-building progress every month.

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