|
 |
Home >> Manage Your Money >> Debt Management
Payday Loans: Dangerous Traps
Signs for payday loans and cash advances creep up everywhere, especially during this time of year. As everyone struggles to pay bills or buy presents, you may find your emails are flooded with advertisements for fax-free payday loans or fee-free cash advances, but beware. Fees associated with payday loans are often much higher than you would find at a traditional lender, and oftentimes, the fees associated with the one-time advance may create a trap of borrowing and re-borrowing that is hard to escape.
Although regulations vary state to state, most payday lenders thrive on loaning people "emergency" loans ranging from as low as $50 to as much as $2,500. Loan periods vary of course, but the most common loan term is 14 days. Unlike a personal loan you might take out from your local bank or credit union, payday lenders do not require a credit check. Most simply require that you have a valid checking account, state issued identification, and recent paycheck stub.
|
|
Generally, payday lenders give you a specific amount of cash, and you write them a post dated check for the amount of the advance plus an additional fee. For example, if you borrow $200, then you would write the lender a post dated check for $230. At the end of the loan term, normally the payday lender either cashes the check or allows you to come in and pay off the $230, and then enter into a subsequent loan.
What makes payday lenders dangerous is the amount of fees charged. Payday lenders typically charge between 15-30% of the loan amount. Your credit cards, auto loans, and mortgages typically express interest as APR. When these payday loans are translated to APR, the 15-30% fee typically translates to 300-800% APR. In comparison, your credit card rarely charges more than 29.99% APR, and this amount is considered extremely high. Often, auto loans, mortgages, and credit cards charge only single digit interest rates. Keep in mind, however, that payday lenders are governed by state law, so interest caps will vary depending on the payday lenders homestate.
Typically, if you use a payday loan one time, the fees are high but comparable to a returned check fee or utility reconnection fee. However, the fees are so high, borrowers typically have trouble repaying the initial loan amount plus the additional fee. As a result, if you use a payday lender, you may find yourself in the untenable position of having to renew the short term loan in order to pay for the interest. This creates a cycle in which you may depend on the payday loan, and since the fees have taken up much of your spare income, the cycle simply repeats itself. Suddenly, instead of a $30 fee, you will have paid hundreds of dollars in a few short months. Additionally, many payday lenders require you to sign an agreement which waives any right you have to contest the transaction in court.
Alternatives to payday lending may exist. Your local bank or credit union may be able to offer you a personal loan or a small loan secured with property. You might also be able to work out payment arrangements if the cash crunch is caused by your mortgage, auto loan, or credit card. Many utility companies and medical providers may also provide payment arrangements or financial hardship forgiveness for those who qualify.
Published on BankingQuestions.com 12/15/08
|
| |
|
Accounts
Article
Q&A
Podcast
Video
Blog
Discussions
PDF
Powerpoint
