Know What You're Paying For

By: Javi Calderon
Know what you’re Paying For: How a Payday Loan Works

Before you sign for a new car you read the contract and make sure you know what you’re getting and what the stipulations are; when you sign up for a new service (cable, phone service, electricity, lawn or home maintenance) you do the same thing. You are putting your financial well-being on the line and expecting a quality product in return. When you’re agreeing to accept a consumer loan you should have the same approach. Make sure you know exactly what you’re getting and know exactly what the stipulations are for paying it back.

How Payday Loans Work

You should be aware of your financial limitations and the intended purposes of payday loans. The Community Financial Services Association of America, which oversees their network of reputable payday loan lenders, carefully outlines the appropriate uses of payday loans. They use the analogy of a taxi cab. Much like a taxi cab is a reliable and financially viable option for travelling short distances; a cash advance is a financially viable method for weathering short-term money problems. However, an extended cab ride will end up costing you an exorbitant amount and the use of payday loans as solutions for permanent or long-term money problems will only leave you with more issues to solve.

Each state has their own specific payday loan laws, so make sure you are aware of those that pertain to you. For example, Texas has outlawed payday loans while the State of Maine allows up to a $33.33 fee.

The CFSA requires all customers to present proof of proper identification, an active checking account, and a regular income. The customer is then asked to fill out a loan application. If the lender accepts the application the customer is presented with an agreement that includes all transaction terms, including the amount lent and the amount the consumer will have to pay back, both in dollars and as an annual percentage rate. The contract also explains specific disclosures required by the Truth in Lending Act.

After signing the agreement the customer is required to sign over a personal check for the amount of the payday cash advance plus the agreed upon fee. The payday lender then completes the transaction by issuing the customer their payday advance.

The loan lender holds the check for the agreed duration of the loan. If the customer does return to claim the check with cash the lender deposits it.

When dealing with any financial service it is absolutely critical to know what you’re paying and know what you’re paying for. Read the fine print and be honest with yourself. If you have any doubt that you may not be able to pay the loan back by the agreed date don’t sign the agreement.

People who fall into a cycle of payday loans and debt do so because they miscalculated what they could afford to pay back or used repeated payday loans to alleviate a persistent financial problem. In finance responsibility is key: make sure you can afford the payday loan you take out, and only use it as a short-term solution.