You see ads just about everywhere you go for payday loans, cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans. The Federal Trade Commission, the nation’s consumer protection agency, says these short-term, high interest loans come with a high price to pay.
Here’s how they work: A borrower writes a check made out to the lender for the amount the person wants to borrow, plus the fee they must pay. The lender then gives the borrower the agreed upon amount, and they agree on a date that the lender can cash the check given to him, usually on the borrower's payday, hence the name "payday loans". Analterative would be for the lender to deposit the funds electronically into the borrower's bank account, then the loan amount would be debited from that same account, plus the fee, on the agreeed upon date. The fee is typically a percentage cut of the amount borrowed, or can be charged in increments, for example a $10 for every $100. The borrower is charged new fees every time the same loan is extended.
The federal Truth in Lending Act treats payday loans like other types of credit: the lender must disclose the cost of the loan. Payday lenders must give you the finance charge (in dollars) and the annual percentage rate (APR — yearly cost of credit) in writing before you sign for the loan. The APR is based on several factors, including the amount you borrow, the interest rate charged, and the length of the loan.
A payday loan — that is, a cash advance secured by a personal check or paid by electronic transfer, is a very expensive loan. How expensive? Let's look at an example, let's say you want to borrow $100 for 2 weeks. The fee to borrow this money is $15, so you write a check for $115. You then give it to the lender, who agrees to hold the check until your next payday, and gives you $100 for right now. When the payday comes, the lender either cashes the check for $115, or you've opted to extend the loan for another 14 days, and another $15. The annual percentage rate on this loan is over 390%! If you extend the loan 3 times, your charges would be $60, just to borrow $100 for 8 weeks!
These are some of the highest interest rate loans around, and you should search for an alternative.
More Articles
Credit Repair
Credit Card Consolidation
