Payday
Loans ARE NOT Debt Solutions
"I
just need enough cash to tide me over until payday."
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 and are not part of a good debt solutions plan.
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 these debt solutions 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 interest rate.
- Make
a realistic debt solutions 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 overdraft protection.
- 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.
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 any of 150
consumer topics, call toll-free, 1-877-FTC-HELP
(1-877-382-4357), or use the online
complaint form. The FTC enters Internet, telemarketing,
and other fraud-related complaints into Consumer Sentinel,
a secure, online database available to hundreds of civil and
criminal law enforcement agencies worldwide.
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General Questions
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