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Payday
Loans
Check cashers, finance companies and others are making small,
short-term, high-rate loans that go by a variety of names: payday loans,
cash advance loans, check advance loans, post-dated check loans or
deferred deposit check loans.
Usually, a borrower writes a personal check payable to the lender for
the amount he or she wishes to borrow plus a fee. The company gives the
borrower the amount of the check minus the fee. Fees charged for payday
loans are usually a percentage of the face value of the check or a fee
charged per amount borrowed - say, for every $50 or $100 loaned. And, if
you extend or "roll-over" the loan - say for another two weeks - you
will pay the fees for each extension.
Under the Truth in Lending Act, the cost of payday loans - like other
types of credit - must be disclosed. Among other information, you must
receive, in writing, the finance charge (a dollar amount) and the annual
percentage rate or APR (the cost of credit on a yearly basis).
A cash advance loan secured by a personal check - such as a payday
loan - is very expensive credit. Let's say you write a personal check
for $115 to borrow $100 for up to 14 days. The check casher or payday
lender agrees to hold the check until your next payday. At that time,
depending on the particular plan, the lender deposits the check, you
redeem the check by paying the $115 in cash, or you roll-over the check
by paying a fee to extend the loan for another two weeks. In this
example, the cost of the initial loan is a $15 finance charge and 391
percent APR. If you roll-over the loan three times, the finance charge
would climb to $60 to borrow $100.
Alternatives to Payday Loans
There are other options. Consider the possibilities before choosing a
payday loan:
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When you need credit, shop carefully. Compare offers.
Look for the credit offer with the lowest APR - consider a small loan
from your credit union or small loan company, an advance on pay from
your employer, or a loan from family or friends. A cash advance on a
credit card also may be a possibility, but it may have a higher
interest rate than your other sources of funds: find out the terms
before you decide. Also, a local community-based organization may make
small business loans to individuals.
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Compare the APR and the finance charge (which includes
loan fees, interest and other types of credit costs) of credit offers
to get the lowest cost.
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Ask your creditors for more time to pay your bills.
Find out what they will charge for that service - as a late charge, an
additional finance charge or a higher interest rate.
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Make a realistic budget, and figure your monthly and
daily expenditures. Avoid unnecessary purchases - even small daily
items. Their costs add up. Also, build some savings - even small
deposits can help - to avoid borrowing for emergencies, unexpected
expenses or other items. For example, by putting the amount of the fee
that would be paid on a typical $300 payday loan in a savings account
for six months, you would have extra dollars available. This can give
you a buffer against financial emergencies.
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Find out if you have, or can get, overdraft protection
on your checking account. If you are regularly using most or all of
the funds in your account and if you make a mistake in your checking
(or savings) account ledger or records, overdraft protection can help
protect you from further credit problems. Find out the terms of
overdraft protection.
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If you need help working out a debt repayment plan
with creditors or developing a budget, contact your local consumer
credit counseling service. There are non-profit groups in every state
that offer credit guidance to consumers. These services are available
at little or no cost. Also, check with your employer, credit union or
housing authority for no- or low-cost credit counseling programs.
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If you decide you must use a payday loan, borrow only
as much as you can afford to pay with your next paycheck and still
have enough to make it to the next payday. |
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TIP:
When consolidating debt, some debt consolidation companies let you have access to a debt management program, and financial counceling.
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