Look Out for Sharks: Payday loans


Series: Spending Money	Page 1 of 2
Look Out for Sharks: Payday Loans Terms of Use:

Don’t be fooled by the ads with the smiling cashiers or the convenient neighborhood locations. You’re being lured into shark-infested waters that may turn into a whirlpool of debt. Check into cash and you may be checking into further trouble.

Let’s say you need $100 until your next payday. You write a “payday lender” a check for $115 and date it two weeks from now. The payday lender waits two weeks to cash your check. Then you put your paycheck into your account so your check will clear or you return with cash. You’ve got your $100 and the lender makes $15 on the deal.

But wait … do you really have $115 to spare on payday and can you get by until next payday? If not, the payday lender will "roll-over" the loan, and you may find yourself paying more fees and being in more debt than you intended.

Actually, a $15 fee per $100 is low for most payday lenders: many charge $25 and $30 per hundred. The fees become really outrageous if you don’t pay the loan back right away and instead roll it over and pay another fee.

Every time you roll over a payday loan, your interest rate climbs even higher. People can end up paying several times the amount they borrowed in the first place.

Here’s the catch: By calling their $15 a “fee” or “finance charge,” payday lenders try to hide the fact that they are really charging outrageous interest rates.

Whenever you take out a loan, you are actually buying money for a cost. The way to compare loan costs is to look at the APR or annual percentage rate you are being charged.

When you do this comparison, payday lenders just don’t add up. A $15 fee on a 14-day $100 loan means you’re paying an APR of 391%.

Compare that to a bank or credit union’s APRs ranging from 10% to 18%. The APRs for cash advances on a credit card usually range from 16% to 21%.

Quick cash is appealing to more and more unaware consumers these days. Payday lending grew from a $10 billion business in 2000 to a $40 billion business in 2003 and growing.

Payday lenders typically operate in low income, minority neighborhoods or around military bases.

Series: Spending Money	Page 2 of 2
Look Out for Sharks: Payday Loans Terms of Use:

Usually payday lending is just one of many “fringe banking” services provided at high costs. Other services include check cashing, money orders, prepaid phone cards and wire transfers.

If consumers instead opened an account at a credit union or bank, these services might even be free! However, some people cannot open accounts because they are not in this country legally, and the availability of banking services in some neighborhoods is limited.

Two-thirds of payday loans go to people who use them at least four times a year; and a third go to those who borrow at least once a month, according to the Center for Responsible Lending.

What can you do if you find yourself short of cash and enticed by the quick cash promise of a payday loan?

Consider these alternatives first:

· See about getting an advance from your employer

· Find out about emergency assistance programs

· Apply for a small consumer loan from your financial institution

· Get a cash advance on your credit card

· Look into a military loan

· Ask friends or family

Now to avoid the need for a payday loan in the future:

+ Make a realistic budget

+ Build some savings, even if you can only put away small amounts. If you saved the amount of the fees paid on payday loans in a year, you could have a cushion for short-term cash emergencies.