By: Elisabeth Myrick, Contributing Editor
Payday loans are becoming an increasingly popular method for borrowing money. These “stores,” also known as deferred deposit or payday lenders, give customers a cash advance on their paycheck, with a fee associated with the cost of borrowing a short-term personal loan.
The payday cash loan works like this: If a consumer needs $150 for a repair, they write a postdated check to the payday loan company for the amount needed, in this case $150, plus a fee, perhaps $50. The company then gives the borrower $150 and keeps the fee when they cash the personal check the borrower wrote. This ends up equaling an Annual Percentage Rate of nearly 300 percent.
And what happens after the customer receives their paycheck, but finds they are unable to repay the loan due to other bills? They can request to instead pay a smaller fee over an extended period of time while interest, sometimes then exceeding more than 500-1,800 percent before the loan is paid in full, continues to accrue. Many consumers who believe they have no choice but to use payday cash advance services find they are unable to pay the loan back once they are paid, leading to an endless cycle of greater debt.
Some consumers have even reported feeling threatened when they call to request an extension from the payday lender. Some have even said the lender claimed they would have the consumer arrested and jailed for not paying on time. For these reasons, it is extremely important to shop around in order to find legitimate, friendly, and reliable payday loan companies and lenders.
This prosperous business is very similar to the loan-sharking associated with “salary lenders,” later known as “salary buyers” in the early 19th and 20th centuries. These individuals were called names such as sharks, leeches and extortionists. Today, they are called “legal loan sharks” by consumer advocates.
The payday cash advance business is very lucrative and is reportedly doubling its profits each year. The type of consumer most likely to use this service is working-class, with less than favorable credit and little savings. These are the consumers who cannot put the repair or other bill on a credit card or dip into emergency savings, as other consumers can. However, college students and military personnel are increasingly becoming targets of these companies.
Payday loans are certainly not for everyone, however, if you are a financially responsible consumer seeking out a one-time, short-term loan to finance an emergency expense and you are certain you can repay the loan by the end of it’s term, then payday loans can be extremely beneficial for you. Otherwise, there are a few alternatives that should be considered before using a payday loan:
- If you are looking to pay on a credit card, consider asking to have the monthly payment waived. Companies are more likely to grant this if you have never been late in making a monthly payment, or if you are not over the limit on your card. This does not mean interest will not continue to accrue, however the interest is likely to be less than what a cash advance would cost you.
- Try to make a different payment schedule with credit card companies, utilities, car loans, even mortgage companies. If a bill is due at a time when you know you will not have money, or if you are easily tempted to spend money before a bill is due, ask to have the payment date moved closer to your payday.
- Borrow the money from a friend or relative, but make sure you will be able to pay them back quickly or suggest a repayment plan.
Before deciding to utilize a cash advance, it is important to look at the APR. Federal law dictates that lenders must divulge the cost of any loan according to the Truth in Lending Disclosure. It is also important to look at the term length. Comparing one company who gives more time to repay the debt is usually a better choice than one who requires repayment immediately, if the fee rate is fixed.
There are a few times when a payday loan is justified:
- When late fees on a credit card are more expensive than the fee for the payday loan.
- To avoid being reported for a late payment, such as a mortgage or car payment; this can be damaging to your credit score long-term.
- When the loan is interest free. There are a few companies that offer zero interest to first time customers, so if you really need the loan, try to find this type of company first.
Carefully researching your options may save you hundreds or even thousands of dollars if it is ever necessary for you to take one of these short-term personal loans.
