What You Should Know About Payday Loans and Cash Advances
Fast cash Payday style loans or cash advances may not be the best solution for your short term cash needs.
How Payday Loans Work:
Specifics may vary from lender to lender, but in general, here’s how they work:
- The borrower writes a personal check to the lender. The amount of this check is equal to a) the cash advance or payday loan plus b) interest and service fees charged by the lender.
- The lender gives the borrower the face value of the check (a in step one) minus the fees (b).
- The lender then holds the check until the due date of the loan. The due date is typically, but not always, the next payday for the borrower.
How Payday Loan Fees are Calculated
The fees on the cash advance (loan) can be based on increments of the money borrowed. For example: a fee of $15 for every $100 borrowed. They may also be a percentage of the face value of the check written by the borrower. The borrow can be charged additional fees if the loan is extended.
The federal Truth in Lending Act requires lenders to disclose the true cost of the loan. Lenders must provide in writing the finance charge ( service fee ) and the annual percentage rate ( APR ) before you sign the loan. The APR may vary, and is based on the length of your loan, the service fees, your interest rate, and the amount borrowed. You can calculate this APR using our calculator.
A Payday loan can be a very expensive financing tool. Let’s say you borrow $200 for two weeks and you write a person check for $225, with the additional $25 being the fee to borrow the money. The lender agrees to hold your check for the 14 days. When that time comes, the lender deposits the check and $225 is deducted from your checking account. But if you roll-over the loan for an additional 14 days, another $25 service fee is added, so in 14 days, $250 will be deducted from your checking account. So you will have paid $50 to borrow $200, which equates to an annualized interest rate of 300% !
Alternatives to Payday Loans
A payday loan may not be the best option for your situation. Consider these alternatives.
- Consider joining a credit union. Small short-terms loans may be possible using cars or other property for collateral, or your own personal credit. Requesting a cash advance on your credit card at 21% is high interest, but still considerably less than the payday loan or cash advance.
- If you take a payday loan or cash advance, shop online for the lowest costs. Compare the finance charge (service fee) and APR, which includes interest and other credit costs. Look for the lowest overall APR. If you are in the Military, you receive special protections against unreasonably high fees or rates. But all consumers in most states have some degree of protection which limits interest rates and fees.
- Despite protections payday loans are expensive debt. If you roll-over the loan the actual cost of the borrowed funds could be double the amount lended. Taking the time to search for other credit offers may net you lower costs.
- Contact your loan servicer, or creditor, as soon as you realize you are having difficulty making payments. Most will will work with consumers and give an extension on your bills if they believe you are acting in good faith.
- Contact a credit counseling service to help create a personal budget or to work out a debt repayment plan with creditors. There are non-profit groups in every state that offer credit counseling to consumers at no cost.
- Gather your daily and monthly expenses and make a realistic budget. Plan for your spending needs and avoid unnecessary purchases. Small every day items like coffee or newspapers add up. Commit to set aside a small amount for savings each week, even $5 will add up and help with emergency or rainy day expenses. Saving the fees on a $200 on a six month payday loan, for example, will create a significant buffer against needing the loan in the first place.
- Obtain overdraft protection for your checking account. This is NOT a loan, but it will help protect you from checks being returned to creditors and create further problems. Shop around for the best terms on overdraft protection, ask the cost per item and what it covers, or for how long.
The bottom line on payday loans is that if you must use one, pay it back quickly. Do not allow it to roll over and increase your costs, and budget, budget, budget.
The FTC provides information to help consumers spot, stop, and avoid fraudulent, deceptive and unfair business practices in the marketplace. Complaints can be filed at https://www.ftccomplaintassistant.gov/ or to get free information about consumer issues and protection visit http://ftc.gov/
You can contact the consumer protection agency in your area for more information on state or local protections for cash advance and payday loans. You may also consult the GSA Consumer Action Handbook at www.consumeraction.gov. And state offices are listed at: www.consumeraction.gov/state.shtml