Payday Loans

Payday loans are considered advance loans, check advance loans, post-dated check loans, or deferred deposit loans. Regardless of their name, these small, short-term, high-rate loans by check cashers, finance companies and others all come at a very high price.  Consumers with no bank accounts or credit cards are the usual customers of payday lenders.

Here’s how they work;  A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check minus the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. The fees on these loans can be a percentage of the face value of the check or they can be based on increments of money borrowed, such as a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”

The Federal Truth in Lending Act treats payday loans like other types of credit in that the lenders must disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and the annual percentage rate (APR which is the cost of credit on a yearly basis) in writing before you sign for the loan. A payday loan, a cash advance secured by a personal check, or paid by electronic transfer is very expensive credit.

For example, you need to borrow $100 for two weeks. You write a personal check for $115, which includes a $15 fee to borrow the money. The payday lender agrees to hold your check until your next payday. When that day arrives, either the lender deposits the check, you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

Alternatives to Payday Loans

Shop around to find the lowest credit offer.  Compare the annual percentage rate and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest annual percentage rate.

Contact your creditors or loan servicer as quickly as possible to ask for more time, if you are having trouble with your payments. Many may be willing to work with you.

Contact your local consumer credit counseling service, to help work out a debt repayment plan with creditors or developing a budget.

Make a realistic budget, including your monthly and daily expenditures. Try to avoid unnecessary purchases. At the same time, try to build some savings.

Consider overdraft protection on your checking account, if you are using most or all the funds in your account regularly.  If you make a mistake in your account records, overdraft protection can help protect you from further credit problems.

Think about possibly using peer to peer lending as an alternative.  Sites like Prosper and Lending Club offer alternatives that are much less expensive.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Debt, Debt Management, Financial, Getting Credit, Money & Identity, Saving Money

This post was written by John Ulzheimer