Loans = Costly Cash
"I just need enough cash to tide me over until
"GET CASH UNTIL PAYDAY! . . . $100 OR MORE . . .
The ads are on the radio, television, the Internet, even in the mail. They refer to
payday loans - which come at a very high price.
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
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:
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.
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.
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
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.
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
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.
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.
If you believe a lender has violated the Truth in Lending Act, file a complaint with
The FTC works for the consumer to
prevent fraudulent, deceptive and unfair business practices in the
marketplace and to provide information to help consumers spot, stop and
avoid them. To file a
complaint or to get free information
on consumer issues, visit
call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The
FTC enters Internet, telemarketing, identity theft and other fraud-related
Consumer Sentinel, a
secure, online database available to hundreds of civil and criminal law
enforcement agencies in the U.S. and abroad.
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