7 Rip-Off Tip-Offs (page 7 of 8)

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7. Payday Loans

After her divorce, Gail Meyers, 36, had a daughter to support. Even working two jobs didn't bring in enough to cover her expenses, so she borrowed $300 against her next paycheck. Getting the money at Check Into Cash, a payday loan store, was easy. "I wrote a check for $345, and they told me to come back in two weeks with the cash, or they'd deposit the check to cover the loan plus $45 in interest."

When payday arrived, however, she was again short on cash. "I got into a vicious cycle of renewing the loan and paying an additional $45 every two weeks," says Meyers, a social worker from Columbus, Ohio. "Before I knew it, I was trapped." She eventually used a tax refund to pay off the $2,500 loan.

According to the Center for Responsible Lending, payday lenders rake in $4.2 billion a year by charging a whopping 391 percent to 500 percent in interest. Only 15 states and the District of Columbia ban payday loans or cap interest at 36 percent. "The industry justifies this by saying the loans are for short-term emergencies," says CRL's Uriah King. "For most people, they're like financial quicksand-you get in deeper and deeper." A CRL study found that the average borrower flips the debt five or more times, repaying $793 on a $325 loan.

The best advice: If you're really in a pinch, opt for a cash advance on your credit card (about 28 percent in interest, plus transaction fees). If you belong to a credit union, you can usually get up to 18 percent interest on small unsecured loans. As an alternative to payday borrowing, the FDIC launched a pilot program in February in which 550 bank branches in 27 states will offer loans of up to $1,000 at an APR of up to 36 percent. That's high, but it beats 500 percent.

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