Payday Loans

Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives

“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, 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 that regardless of their name, these small, short-term, high-rate loans by check cashers, finance companies and others all come at a very high price.

Here’s how they work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically. The loan amount is due to be debited the next payday. The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”

A payday loan — that is, a cash advance secured by a personal check or paid by electronic transfer is very expensive credit. How expensive? Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. If you agree to electronic payments instead of a check, here’s what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

Alternatives to Payday Loans

Before you decide to take out a payday loan, consider some alternatives.

1. Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
2. Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs.
3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
4. Contact Debt Management Credit Counseling, (DMCC) if you need help working out a debt repayment plan with creditors or developing a budget.
5. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.

The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to next payday.

Protections for Military Consumers:

Payday loans (and certain other financing) offered to servicemembers and their dependents must include certain protections, under Federal law and a Department of Defense rule. For example, for payday loans offered after October 1, 2007, the military annual percentage rate cannot exceed 36%. Most fees and charges, with few exceptions, are included in the rate. Creditors also may not, for example, require use of a check or access to a bank account for the loan, mandatory arbitration, and unreasonable legal notices. Military consumers also must be given certain disclosures about the loan costs and your rights. Credit agreements that violate the protections are void. Creditors that offer payday loans may ask loan applicants to sign a statement about their military affiliation.

Even with these protections, payday loans can be costly, especially if you roll-over the loan. You instead may be able to obtain financial assistance from military aid societies, such as the Army Emergency Relief, Navy and Marine Corps Relief Society, Air Force Aid Society, or Coast Guard Mutual Aid. You may be able to borrow from families or friends, or get an advance on your paycheck from your employer. If you still need credit, loans from a credit union, bank, or a small loan company may offer you lower rates and costs. They may have special offers for military applicants, and may help you start a savings account. A cash advance on your credit card may be possible, but it could be costly. Find out the terms for any credit before you sign. You may request free legal advice about a credit application from a service legal assistance office, or financial counseling from a consumer credit counselor, including about deferring your payments.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org

Recently, several members of an online network were having a discussion about a payday loan. The payday loan company would loan someone $100, and they would have to pay $115.00 back two weeks later. What is the interest rate? (No, this isn’t a word problem on a math test!)

The payday loan company said that the interest rate is 15%, since 15% of the loan is being repaid as interest. While accurate from one perspective, this number is very misleading. The interest rate on nearly all loans is determined on an Annual Percentage Rate, or APR. This means that you look at the interest that would be paid on the loan in a year, divide it by the principal balance, and come up with the APR. For example, if you borrow $100 on January 1 and pay $1 per month in interest for 12 months, the loan has a 12% APR, since 12 ÷ 100 = 0.12 = 12%.

This works for larger loans as well. If you pay $500 per month interest on a $100,000 loan, the APR is computed this way:

$500 x 12 months = $6,000.
$6,000 ÷ $100,000 = 0.06 = 6%

So if you’re paying $500 per month interest on a $100,000 loan, the APR is 6%.

Let’s look at that payday loan again…

$15.00 interest for 2 weeks = $390 per year.
$390 ÷ $100 = 3.90 = 390% APR

So that loan that requires you to pay “only” $115 back in two weeks really has a 390% APR!

If you or someone you know has been overwhelmed with payday loan debt, you may be eligible for a payday loan repayment program. Florida Residents are eligible for a  60-day deferment. Call DMCC 866.618.3328 for more information and free assistance. 

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org.

In the latest of a series of research reports, the Center for Responsible Lending (CRL) has found that payday loan customers remain indebted double the time that the Federal Deposit Insurance Corporation recommends.

“Payday Loans Inc.: Short on Credit, Long on Debt” verifies how what begins as usually a two-week, small-dollar loan becomes a deepening pit of debt lasting on average 212 days in the first year of borrowing and growing to 372 days in the succeeding year. Yet, according to FDIC guidance, no Payday borrower should be indebted for more than 90 days in any 12-month period.

The report also shows how the size of these loans grow over time as well. Although the first Payday loan is typically only $279, the average customer will borrow more in principal and reaches $466 over time. The catch is that as the amount borrowed increases, so do the applicable fees and interest that the borrower must also pay.  According to CRL, much of the problem with fully retiring payday debt is due to the industry requirement that borrowers pay the entire loan with the next paycheck. For most borrowers, this specific loan term denies them the ability to financially manage the rest of their lives.  The financial burden of only having two weeks to repay can be insurmountable. For many borrowers, even a $300 loan eats up all remaining funds after the borrower has paid for just their most basic living expenses, because they have such a short time to pay the loan back.

At a time when so many people of modest means are striving to financially piece their lives together, dollars are particularly dear. Quick cash may be available from payday lenders. But, there is nothing quick about getting rid of that debt. Borrowers beware.

If you have Payday Loans that you are struggling to repay, or are caught up in the seemingly never ending cycle of renewing loans, DMCC can help.

Click Here to learn about DMCC’s Pay Day Loan Assistance.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org.