Anyone who has listened to the radio, watched late-night television, or browsed the internet has seen ads for “EZ Payday Loans!” “Overnight Payday Loans! ”Low-Fee, Confidential Payday Loans!” If you check your spam box, you might even see ads for these offers, which should be your first clue as to how these loans work. All these advertisements use many different names to talk about the same thing; payday loans, cash advance loans, check advance loans, post-dated check loans, or deferred deposit check loans. While you may think that these offers are harmless, these quick loans can be very damaging.
Payday loans offer devastatingly high costs for small, short-term loans. The lender forwards cash up front in exchange for a personal check payable to the lender for the borrowed amount, plus a fee. The borrower might also agree to an electronic withdrawal from their checking account on the due date. The loans are for short periods of time, one to four weeks, enough time for the borrower to have cash available until payday. However, many people go into these arrangements without understanding them. Let’s look at some of the things people often don’t realize before they take on a payday loan.
1.) Fees for Payday Loans are Exploitatively High.
The fees charged for taking out a payday loan are usually either a percentage of the amount borrowed or calculated based on every $100 you borrow. On top of this, if you extend or “roll-over” the loan, you will pay additional fees for each extension. While this may not sound expensive, studies have shown that the interest rates on payday loans ultimately total from 390% to nearly 900%. Of course, most lenders don’t quote accurate interest rates to their customers. These fees are often hidden in the fine print of their contracts.
2.) Lenders are not Up-Front with the Structure of Payday Loans.
A hypothetical customer borrows $300 until their next paycheck. This customer writes a check to the lender for $345, which includes not only the original $300, but also a $45 fee. The lender gives the customer $300, holding the customer’s check until an agreed-upon date. On that date, either the customer redeems the check from the lender by paying the $345 in cash, or the lender deposits the check. The customer may also roll over the loan by paying a fee to extend the loan for another two weeks.
3.) Often, Payday Loans Lead to a Vicious Cycle of Debt.
Cash advance loans are a dangerously expensive method of obtaining short-term credit. In the above example, the initial loan’s cost is a $45 finance charge. If that charge is rolled over every two weeks, that can add up to $1,170 for a year, or a 390 percent APR (annual percentage rate). It is no surprise that many people find they are unable to pay back their loans. This is how a vicious cycle of debt and extensions begins that can cost many thousands more than the initial loan.
4.) Plenty of Good Alternatives
On any loan, you should compare the Annual Percentage Rate (APR) and the finance charge, and choose the offer with the lowest APR. You might also consider a small loan from your credit union or bank, or asking your employer for a pay advance. A cash advance on your credit card is another solid, though more expensive than the prior suggestions. Finally, you might ask your creditors for more time to pay your bills, as even the fees from a delayed payment might be less than a payday loan’s fees.
5.) It is Easy to Avoid the Need for Payday Loans.
First, budget realistically, and avoid unnecessary purchases. Try to set aside some savings for emergencies. You also might talk to your bank about overdraft protection for your checking account, which will protect you from incurring fees for bounced checks. If you take these measures, and you still find yourself having short-term cash problems on a regular basis, or if you just need help developing a budget or paying off debt, make an appointment with a consumer credit counseling service. All these methods can help make payday loans totally unnecessary.
If, after all this, you come to the conclusion that you must use a payday loan, borrow only as much as you can afford to pay with your next pay check, while still having enough to make it to following payday. Spending beyond your means is always a bad idea. Payday loans are an exploitative and poor fix to easily manageable financial difficulties. They take advantage of the desperation of people living hand to mouth, robbing them of billions of dollars a year in hidden fees and roll-over costs. Use some basic budgeting, and don’t fall victim to these immoral companies.
Helen works in marketing and finance for Clickinks.com, online distributor of brother ink cartridges and other ink cartridges for your printing needs. Helen loves her job, when she is not in the office she enjoy playing the piano and learning how to code.
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Category: Money Basics