What are Cash Advance or Payday Loans
(Source: US Federal Trade Commission)
"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.
There are other options. Consider the possibilities before choosing a
payday loan:
 | 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.
|
| 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.
|
| 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.
|
| 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.
|
| 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.
|
| 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.
|
| 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. |
To Complain/For More Information
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 consumer issues, visit
www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY:
1-866-653-4261. 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 in the U.S. and abroad.
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