Payday Loans

Deferred deposit loans, commonly known as “payday loans” (also called cash advance loans, check advance loans and post-dated check loans), have become an increasingly popular method for consumers to access fast cash.

How it works
Bad credit? No credit? Not a problem. All a consumer needs to obtain a payday loan is a job, a phone, a utility bill, a checking account, and a driver’s license. The borrower writes a personal check payable to the lender for the amount he wishes to borrow, plus a fee – typically 10% to 25% of the check. The check is held for one to four weeks, usually until the customer’s next payday, at which time he either redeems the check by paying the face amount, or allows the check to be cashed. If the borrower can’t afford to cover the check, he may roll it over for another term by writing another check, which will result in another set of fees being added to the balance.

Consumers may be mislead into thinking that payday loans are a cheap and convenient way of borrowing money for the short term. However, with average annual interest rates ranging from 390% to 871%, payday loans are no bargain. Consider this example:

• Loan: $200
• 15% fee: $30
• Amount that must be repaid to lender: $230
• Repayment period: 2 weeks

Paying a $30 fee on a $200 loan with a 2 week repayment period translates to an APR of 390%. Compare the costs to other types of credit:

To Borrow $200 and Repay in One Month

Consumers often have difficulty repaying the entire loan when their payday arrives because it will leave them with little or no money for their living expenses. Result: The consumer pays another round of charges and fees and obtains no additional cash in return.

Collection tactics for payday loans can be very aggressive. A default on a payday loan involves a worthless check, and some state credit laws allow for triple damages when a bad check is used in a retail transaction. Lenders may also require customers to sign an “Assignment of Salary and Wages” authorizing them to go directly to the borrower’s employer to ask for the amount owed to be deducted from the borrower’s paycheck and paid to the lender.

Breaking the Payday Loan Cycle
The average payday loan customer makes eleven transactions a year – and maintains an endless sequence of debt. If you find yourself caught in the payday loan cycle, follow the steps below for relief:

• Analyze your financial situation in its entirety:
  
  
  1. Set reasonable and achievable financial goals.
  2. Understand your earning potential: Can you work overtime, obtain a second job, or turn a hobby into income?
  3. Review your expenses: Can you reduce or eliminate anything in the short or long term?
  4. Review your debt: List everything, then set priorities. Because the interest rates on payday loans are well above other types of debt, treat it as a financial priority.
  5. Track your spending and regularly review your budget.
     
     
• Commit yourself to not using payday loans in the future.
• If you are using payday loans because you inadvertently overdraw on your account, consider overdraft protection.
• Develop a savings plan. Three to six months' worth of expenses in an accessible savings account is recommended, but anything is better than nothing. A hundred dollars set aside for emergencies can save you a trip to the payday loan company – and a tremendous amount in fees.
• Understand the root of the problem. Are you spending beyond your means because you're income is insufficient to live on, or because you're spending more than you need to on non-necessities?

Other ways to generate money
Difficult financial situations do happen. It is recommended that consumers consider all available options before choosing to use a payday loan:

• Ask your bank or credit union for a loan. The interest rate cap for unsecured loans is currently 36% – significantly lower than a payday loan.
• Request an extension on what you owe. If you have had a good payment history, this may be the best option. Ask about finance and late charges for delinquent payments and payment plans.
• In an emergency, consider using a credit card to pay your bill.
• A cash advance on your credit card is often more expensive than a credit card purchase, but still an option. Check with your credit card company to compare rates.
• Borrow from a friend or family member.
• Take inventory of your belongings. You may be able to sell an asset.
• Some employers will give an advance on a paycheck. Check with your human resources department for specific regulations.
  

Laws that protect consumers
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). Collectors for payday loans must comply with the Fair Debt Collection Practices Act. Any complaint against a lender may be filed with the Federal Trade Commission: 1 (877) FTC-HELP, or www.ftc.gov.