Payday Loans = Costly Cash
"I just need enough cash
to tide me over until payday."
"GET CASH UNTIL PAYDAY! .
. . $100 OR MORE . . . FAST."
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 yearly basis).
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:
