You can also re-borrow amount you have repaid. In effect, you have a loan that's always available to you on demand.

Unlike revolving loans, installment loans have a fixed repayment schedule. In most cases, full amount of loan is drawn down (i.e., borrowed) at once and both repayment schedule and amounts are fixed in advance. You do not have option to re-borrow amount that has been repaid.

Adjustable rate versus fixed rate loans

A fixed rate loan is one where interest rate charged is fixed for entire duration of loan. The advantage is that you are immune to fluctuations in interest rates and can budget your cash outflows precisely. The disadvantage to you (the borrower) is that should interest rates fall, you lose in terms of opportunity costs. That is, you could have obtained a lower interest rate had you opted for an adjustable rate loan.

In practice, you can always choose to refinance fixed rate loan at a lower rate if interest rates fall sharply enough to justify it. Bear in mind that your current lender may charge a pre-payment fee if you choose to repay before due date. So difference in interest rates between your old fixed rate loan and new loan should be large enough to justify a switch.

An adjustable rate loan is one where interest charged fluctuates in line with a benchmark rate. This benchmark rate is usually Prime Rate, which is what US Treasury charges its prime (or best) borrowers. The advantage of an adjustable rate (or floating rate) loan is that what you are paying is more or less in line with market. If interest rates decline, so do your costs and vice versa. The disadvantage is that your cash outflows for interest are unpredictable.

As a borrower, if you hold view that interest rates are going to decline, it is best to opt for an adjustable rate loan. But arriving at correct view consistently is easier said than done. Predicting interest rates is a game where even professional market participants and institutions frequently go wrong.

If it is important to you to be able to budget for your interest obligations in advance, a fixed rate loan may be best choice. After all, you can refinance it should interest rates fall significantly.

Keeping these basic facts in mind should help you make more informed borrowing decisions.

Assume you borrow $400 for two weeks at a cost of $15 per $100 per two weeks. At end of two weeks, you owe them a total of $460.

Let's say you don't repay $400 at end of two weeks. Instead, you request a rollover. So you pay them lending fee of $60 and they agree to roll over loan for another two weeks. The total cost of loan at end of 4 weeks may be as follows:

Original loan amount: $400 Fresh lending fees payable: $60 Late fees payable: $60 (assuming late fees apply at same rate as lending fees) Lending fees already paid: $60 Total: $580

At end of this period (which is 4 weeks from day you originally took loan), you decide that you don't have $580 available and so request them to roll loan over for another two weeks. Then this is what it can cost you in total at end of 6 weeks:

Original loan amount: $400 Fresh lending fees payable: $60 Late fees payable: $60 Lending fees already paid: $120 Late fees already paid: $60 Total: $700

If you continue this process for six months (more specifically, for 24 weeks), this is what it may cost you in total:

Original loan amount: $400 Fresh lending fees payable: $60 Late fees payable: $60 Lending fees already paid: $660 Late fees already paid: $600 Total: $1780

For an original loan of $400, in a mere 6 months, payday loan company will collect fees and charges of $1380 from you. That's 3.45 times amount you borrowed. In APR terms that's 749.5%! If over 60% of borrowers roll over their loans, no wonder many payday loan companies are extremely profitable.

Snowballing costs can easily lead you into a debt trap if you get addicted to payday loans.

So what are key points to keep in mind when dealing with payday loan companies? Two things:

First, avoid them (and other high cost borrowings) if at all possible. The best way is, of course, to get your finances fully under control so that you always have cash and / or credit available to meet emergencies.

Second, if you do choose to borrow from payday loan companies, borrow only an amount you're 100% sure you can repay on due date. If that amount is too low to meet your needs, get additional funding from other sources. Because rolling over cash advances is one of worst things you can do to yourself.