Payday Loans May Have You Calling Mayday

What Is a Payday Loan?

A payday loan is a small sum, short-term, high-rate, unsecured personal loan. These kinds of loans are also called cash advance loans, post-date check loans or deferred deposit. They are designed for a small amount of cash needed in an emergency.

How Does a Payday Loan Work?

In a payday loan transaction, the borrower will provide to the lender items such as a paycheck stub, photo identification and a recent bank statement. The borrower writes a check to the lender for the amount and the lender’s fee. (Under law in some states, the lender’s fee is limited.) The lender agrees to hold the check until the customer’s next payday, up to 30 days. At that time, the borrower may redeem the check with cash, allow the lender to deposit the check or roll over the loan by paying another fee.

Are Payday Loans a Good Deal?

Payday lenders claim they are the only option for debt-strapped consumers. But borrowing more money at triple-digit interest rates is never the right solution for people in debt. Because most consumers believe they could be prosecuted for passing a bad check, the payday loan suddenly becomes their priority debt. Thus, the original debt problems that brought them to the lender often cannot be resolved.

Let’s say you want to borrow $200 until you get your next paycheck in two weeks. You write a postdated check to a payday lender for $230 (15% of $200 = $30 lender’s fee + $200 loan amount = $230) and get $200 cash in return. The $30 interest you pay on the loan calculates to an Annual Percentage Rate (APR) of 391%. The payday lender may also charge you a one-time fee of $10 to set up an account.

If you are unable to repay the loan after the agreed-upon 14 days have elapsed, you may elect to extend the loan for another two weeks by paying an additional $30. If you choose to roll over the loan, you will have paid $60. It’s easy to see how these fees can quickly add up – if you extend the loan for a total of six months, you’ll end up paying $360 in fees, without having paid back any of the principal (the original $200).

Are Payday Loans Popular?

The number of payday lenders has grown from an estimated 300 in 1992 to nearly 8,000 in 1999. A recent investment report indicates that the number of payday lenders may grow to 25,000 within two to three years. The industry itself estimates the potential market for payday loans at approximately 35 million households.

Often these loans become “debt treadmills” that exacerbate consumer financial problems. For example, a 1999 study by the Illinois Department of Financial Institutions found 21 percent of borrowers had more than 20 payday loans, and an average of 13 contracts per borrower annually. Indiana found that the average customer had rolled over 10 times per year for 77% of all customers. If the fee was $30 on a $300 loan rolled over 10 times, the total in fees alone are $300 and the customer still owed the $300.

Some lenders fail to provide consumers with Truth in Lending Act (TILA) disclosures which makes it difficult for them to understand the terms and cost of these loans.

Why Then Are Payday Loans Popular?

Nowadays, payday cash advances are amazingly convenient - they are only a click away! Online websites that provide payday loans help eliminate the long waits and tedious credit checks of traditional loan processing. Many online lenders can provide fast and easy cash within one to two business days from start to finish.

What You Should Do When You Need Cash Fast

When you need credit, shop carefully. Compare offers. Consider a small loan from your credit union or small loan company; military personnel have access to both kinds of institutions that are designed to suit their needs. You might ask for an advance on pay from your employer. Consider 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.

Find out if you have, or can get, overdraft protection on your checking account.

If you own or rent, find out if you can delay paying a non-interest bill such as a utility bill and make payment arrangements with the utility company.

Ask your creditors for more time to pay your bills. Find out what they will charge for this service – a late charge, and additional finance charge or a higher interest rate.

Some credit card companies specialize in consumers with financial problems or poor credit histories. Consumers should shop around and not assume they do not qualify for a credit card. Secured credit cards are another option. A secured card is basically a credit card tied to a savings account ($500 for example). The card's credit line is the amount deposited in the savings account. The funds of the account "secure" the amounts charged on the card. Once a consumer has successfully used the secured card for 6 months - 1 year, they can then qualify for a regular unsecured credit card.

Source: Omni Financial®