Life in the USA
This material couresty of the United States Federal Trade Commission
“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
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:
- 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 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.
What Types of FHA Loans Are Available
Personal Finance: Chapter Home
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