Payday Loans = Costly Cash
by Federal Trade Commission |
| The Commission is headed by five Commissioners, nominated by the President and
confirmed by the Senate, each serving a seven-year term. The President chooses
one Commissioner to act as Chairman. No more than three Commissioners can be of
the same political party. |
"I just need enough cash to
tide me over until payday."
"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 extension.
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:
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
If you believe a lender has violated
the Truth in Lending Act, file a complaint with the FTC.
| The FTC works for the consumer to
prevent fraudulent, deceptive and unfair business practices in the
marketplace and to provide information to help consumers spot, stop
and avoid them. To file a complaint, or to get free information on
any of 150 consumer topics, call toll-free, 1-877-FTC-HELP
(1-877-382-4357), or use the online complaint form. The FTC enters
Internet, telemarketing, identity theft and other fraud-related
complaints into Consumer Sentinel, a secure, online database
available to hundreds of civil and criminal law enforcement agencies
U.S. and abroad. |
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