The truth about the real cost of these quick loans as well as a list of better options.
The Biting Price Of Payday Loans
Hard up for cash?
How much are you willing to pay for $100 loan?
A. 5 dollars?
B. 15 dollars?
C. 30 dollars?
D. 400 dollars or more?
If you’re willing to get a payday loan, then you may as well choose answer D.
They go by many names: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit loans. Their ads are everywhere – there are more payday stores in America today than there are McDonald’s. Even where they are outlawed, they seem to flourish. Now a $40 billion-dollar-a-year industry, it’s no wonder they are among the fastest growing financial services in the country. (Source: Paying More For Payday Loans.)
What Is A Payday Loan?
A payday loan is a small, short-term loan with an extremely high cost. The amount of the loan is typically less than $500 and the full amount is due in about two weeks. The loan is given by the company in exchange for two things: 1) a personal check, or an authorization for an automatic draft on a bank account, and 2) a fee -usually between 15 and 30% of the loan amount. If you do not have the funds to pay it off in two weeks, you can get a two week extension- if you pay an additional fee. This extension/renewal process may be repeated any number of times and there in lies the greatest danger.
What Is The Real Cost?
Let’s say you wanted to borrow $100. You would give the company a check for that amount plus their fee – let’s say $115. You walk out with $100 but $115 is due in two weeks. The true cost (of $15 dollars on a $100 loan for two weeks) is equal to an annual percentage rate of 390%! If you had to extend the loan for a little more than two months in order to pay it back, you would give them more in fees than you borrowed!
In fact, you could pay much more than 390 percent. The website, www.paydayloanresource.com, states “Currently, fees charged on paydayloans online range from $15 to $30 on each $100 advanced. Stated another way, annual percentage rates for payday loans generally range between 400 and 1000 APR.” North Carolina Attorney General Roy Cooper says “When you are talking about an interest rate of 450 percent… that’s definitely loan sharking.” (Source: Paying More ForPayday Loans.)
Under the federal Truth In Lending Act, the cost of any loan or credit must be made known to you in writing. You must be shown the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of the credit on an annual basis). (Source: Payday Loans =Costly Cash) Will the payday lender give you this?
Why Do People Take The Bait?
Desperation and/or ignorance are the most common reasons people bite the payday loan hook. Typically, all you need is a job, some identification, and a checking account; so it’s quick and easy to get a payday loan. The idea of quick cash is tempting for someone who doesn’t realize how much it will cost them or for someone who thinks they have no other choice.
In fact, there are many better choices. Jim Blaine, chief executive of the non-profit North Carolina State Employees’ Credit Union, says “A loan shark only charges about 150 percent. Why would you go pay 400 percent? Any other choice on the planet is better.” (Source: Paying More For Payday Loans). The Federal Trade Commission (FTC) and several financial experts point out the following options:
- Ask your creditors for more time to pay your bills. Find out what the charges might be – late or other penalty fees, additional interest, etc.
- Ask for a payroll advance from your employer. Because this is not a loan, there is no interest.
- Ask family or friends for a small private loan. If they have the funds in a savings account and you offer them a higher interest rate, it can be a win/win situation. Remember to put all the terms in writing.
- Look into a small loan from a credit union or small loan company.
- Look into a cash advance on a credit card.
- Look into overdraft protection on your checking account.
- Make a realistic budget or spending plan. This can help you free up money by dropping expenses that are not absolutely necessary or making other adjustments to your current spending. It can help you build some savings so that you will be better prepared for financial emergencies.
- Look into emergency assistance programs. Many faith-based groups and community organizations provide emergency assistance directly or through social service programs.
- Consult your local consumer credit counseling service. There are non-profit organizations in every state that offer credit education and debt management programs. These services are available at little or no cost.
With these or any other options, the critical point is that you compare is the cost of the solution. Compare the Annual Percentage Rate(APR), including all finance charges and all fees, to find the lowest cost.
If You Have Taken A Bite
If you have a payday loan and now find yourself unable to pay it off, there are a few things you can try.
- Contact the payday loan company. Explain why you can’t pay and try to negotiate another payment arrangement. Also, carefully re-read the terms of the agreement you signed. Calculate how much it will cost you if the check bounces – the NSFcharge from your bank, the NSF charge or other penalty charges or interest from the loan company. In the long run, these costs might actually add up to less than the cost of months of renewal/extension fees.
- Look over the list of “better options” (on this page) to see if one of those solutions will help you pay back the payday loan.
- File a complaint with the FTC, if you believe a lender violated the Truth In Lending Act.
- File a complaint with your state attorney general, if you believe you were misled or wronged.
Finally, warn others. You wouldn’t want a friend to swim in shark infested waters.
To Find Out More
• Truth In Lending Act – a link is at the Federal Trade Commission website: www.ftc.gov/bcp/conline/edcams/credit/rules_acts.htm.
• Payday Loans = Costly Cash (FTC): www.ftc.gov/bcp/conline/pubs/alerts/pdayalrt.htm.
• Paying More For Payday Loans (60 Minutes): www.cbsnews.com/stories/2005/05/16/60II/main695461.shtml.
• The Spending Plan (Alliance): www.knowdebt.org.