As the cost of everything continues to rise, many people are finding themselves running out funds before their next payday. Some are turning to payday loans or cash advance stores just to make ends meet. However, many people are not aware of the total cost of payday loans. Many payday borrowers don’t understand that a $15 or $20 fee for borrowing $100 is actually quite expensive. It means the Annual Percentage Rate (APR) is actually around 400%! Not many people would accept this APR on a credit card, but accept it willingly when taking out a payday loan. One reason payday lending companies charge such a high APR is because they don’t do credit checks and they are assuming all the risk in the loan. Many borrowers have poor credit and have few options for borrowing.
Payday loans can also be called: cash advance loans, check advance loans, post-dated check loans or deferred deposit loans. Whatever they are called, they work the same way. A consumer writes a check or completes an electronic transfer form for the amount of the loan plus the fees. The payday lender then gives the consumer the loan amount minus the fees. The fee can be based on a percentage of the value of the check or a set amount for the increments of money borrowed (for example, $20 for every $100 borrowed). The check is then deposited or electronically submitted for payment on the consumer’s next payday. If the consumer realizes that the money won’t be available on the payday they can “roll over” or extend the loan for an additional fee.
“Rolling over” or extending the loan is where most people get in trouble. An individual who borrows the money when they are in desperate need and pays off the loan on the first payday will keep out of debt problems. But someone who extends the loan several times will certainly end up with bigger debt problems than they started with. Certain lenders will only allow a consumer to extend their loan up to the state limit or 4 times whichever is less. If an individual borrows $100 with a $20 fee and then extends the loan 4 times, by the time the loan is paid they have paid $100 in fees, just to borrow $100.
Remember, in the lending/credit world, fees and interest are all considered part of the APR, which is the total cost of the loan. Anyone considering a payday loan should understand and research all the conditions of the loan. Consumers can get more information on making wise choices about payday loans from the FTC at www.ftc.gov.
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