Many of us have seen the signs which advertise “Fast Cash: All it Takes is your Good Word. No Credit Check!” I’m sure many of us have been tempted to use such a service or, indeed, have used such a service for convenience, for fear of a late fee, or for fear of bouncing a check. What many of us don’t realize is the real cost behind the decision to use a payday lender.

The basic model of payday lending looks like this: the borrower, typically a lower to middle income individual with a steady job and a bank account, goes into a payday lender’s office. The individual then writes out a check to the payday lender for an amount between $100 and $500. The payday lender holds the check until the next payday, typically 14 days. This short-term loan can have an Annual Percentage Rate (APR) upwards of 400%. Yes, 400%. At the end of the two weeks, the customer may or may not have the funds to “cover” the check, because there wasn’t a credit check to ensure the individual could afford the loan.

The inevitable cycle of debt begins. The customer may go to another payday lender to cover the first payday loan or the customer may “rollover” the original loan by simply paying the “fee” and putting off the inevitable repayment for another two weeks. The end result is that the customer could end up paying thousands of dollars in “fees” (over several months) for the original loan of less than $500.