The Perils of Payday Loans
If you’re short on cash, avoid payday loans at all costs.
Payday loans are short-term cash loans which carry significant fees and/or finance charges. Here‘s how they work: a borrower writes a personal check to the lender for the amount borrowed plus a fee for borrowing the money. The lender gives the borrower the money less the fees charged, and agrees to hold the check until the due date, usually the borrower’s next payday. In some cases, the borrower gives the lender permission to electronically deposit this balance into the borrower’s checking account. If the loan is not paid back in time and the borrower extends or “rolls it over,” new fees are charged on top of the original loan. Let’s say the borrower requests a payday loan of $100 and the lender charges a $15 fee for a 14-day loan. This is equivalent to an annual percentage rate of 391%. Roll over the loan three times and the finance charge increases to $60 for a $100 loan!
The amounts charged by lenders vary widely. Under federal law, the lender must disclose the finance charges and the annual percentage rate (APR) in writing. In addition, payday loan amounts, terms, finance rates and fee maximums are governed by state banking laws. Some states such as Connecticut and New York prohibit payday lending. For information on the rules for your state’s regulations, check the Consumer Federation of America website.
Before considering a payday loan, carefully consider all your alternatives such as:
- Talking to your creditor about extending the due date if you think you will be late on a payment
- Working some overtime or taking on an additional job
- Asking a relative if they can help you out
- Requesting a payday advance from your employer
- Contacting your school to see if they can provide a small emergency loan, although you may have to be approved for Financial Aid
- Finding a credit union or a small loan company that may offer loans at more reasonable rates
The bottom line: payday loan = bad deal. If you don’t have the money to spend now, don’t spend it.