Think Twice Before Taking A Payday Loan
Storefronts and websites offering payday loans seem to be everywhere. A consumer taking out a payday loan writes a personal check or establishes a transfer from his or her bank account for the amount of the loan plus the loan service fee that will come due on the date of the next paycheck. For example, a $100 cash loan now might cost $115 when payday rolls around.
If the money is paid back on time, payday loans offer a straight forward arrangement in which credit is extended immediately at a clearly defined service cost.
However, if the consumer doesn't pay back the loan and “rolls it over,” another fee is charged. In the example above, by rolling over the loan just once, the consumer will have paid $30 to receive $100, nearly one-third of the original loan.
While this may be a source of last resort when unexpected emergencies arise, the typically high interest rates of payday loans make them a poor option for anyone already in debt.
The federal Truth in Lending Act treats payday loans like other types of credit and lenders must clearly state the dollar amount of the finance charge and the equivalent annual percent rate (APR) of the credit in writing before you sign for the loan.
The Federal Trade Commission suggests that if you use payday loans, limit the amount you borrow and take out a loan for only the amount you can repay with your next paycheck without threatening to make you run short of cash again.
The FTC suggests consumers consider the following alternatives before taking out a payday loan:
- Consider a small loan from your credit union or a small loan company. Some banks and small-community based organizations may offer short-term loans for small amounts. You may also consider a cash advance on a credit card but it may have a high interest rate as well. Shop around and learn about all your available options.
- Look for the credit offer with the lowest cost by comparing the APR (look for the lowest) and the finance charge which includes loan fees, interest and other credit costs. Other credit offers may come with lower rates and costs than those incurred by rolling over payday loans,.
- Many creditors will work with consumers who are acting in good faith and may offer you more time to pay the bill.
- Non-profit credit counseling organizations offer free credit guidance to consumers. Contact them to help you sort out your finances and make a spending plan. They can also help create a debt management and repayment plan to address long-term debt.
- Create a spending plan and stick to it by avoiding unnecessary or spur-of-the-moment purchases. Carve out a small amount to save and it will start to add up. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.
- With regulations regarding banking and credit cards, double check to see if you are currently or can be enrolled in overdraft protection that covers “bounced” checks at your bank. Find out the cost of the service and exactly what it covers. While the fee may be costly, it can protect you from future credit problems when something arises and you can’t make ends meet.
