We've all experienced that awful moment when a cash machine refuses to pay out on an over-extended overdraft, or the humiliation of having a debit card turned down in a busy shop because of a lack of funds. Sometimes there's just not enough money to last the month, whether it's because of an unexpected bill or repair cost, or simply too many bills needing to be paid at once.

When this unfortunate situation arises, many people turn to one of the easiest forms of finance around: the payday loan. These loans are intended to bridge the gap between running out of cash and receiving your next pay check or salary. Borrowers can be lent a small amount, of the order of a few hundred dollars or so, for a short period of time such as a week or ten days, and then repay the loan on their next payday.

They are quick and simple to arrange, usually with no credit checks, and the money can be in your account within 24 hours or even more quickly. All this sounds like a great solution to temporary financial problems, and there's no doubt that used properly, a payday loan or cash advance can be a lifesaver. However there are two major and related drawbacks.

Firstly, these loans aren't cheap - far from it. They are amongst the most expensive types of credit available on the legal market. For each hundred dollars borrowed, it's normal to have to pay a fee of around twenty dollars back as well as the amount you borrowed. At first glance this may seem like a reasonable price to pay, working out at around 20% interest - not overly different to a credit card, for example. The crucial difference is that you're paying this interest charge on a very short term loan. Where with a payday loan you might be paying 20% interest on money borrowed for a week, if you borrowed on a credit card your interest would be nearer to 2% for a whole month. Calculated over a full year, payday loans often have APRs well into four figures or even higher.