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Dangerous Consumer Rip-off
Payday loans, also called "cash advance loans,"
"check advance loans," "postdated check loans," or
"deferred-deposit check loans," may seem like an
easy solution to a temporary cash shortage, but
for many people, payday loans are the beginning of
a vicious and very expensive cycle that they find
difficult if not impossible to get out of.
Here's an example: Robin was $200 short of having
enough money to pay her bills, so she borrowed it
from a payday lender who charged her $60 for up to
15 days. Her plan was to repay the money when she
received her next paycheck in two weeks. When the
time came, she still didn't have enough money to
pay off the amount she borrowed plus the $60 fee,
so she paid an additional $60 fee and rolled her
payday loan over for another two weeks.
The cycle continued, and at the end of six months
she had paid $720 in fees and still owed the
original $200. Her hopes of getting out from under
this black cloud are slim.
The interest rates on payday loans range from 300%
to over 1,000%. Compare that to the interest rate
on a small personal loan from a bank, which tends
to be more than ten times lower than the rates on
even the lowest rate payday loans. Even a
relatively high-interest rate credit card has a
much lower rate than a payday loan.
Who Uses Payday Loans?
Payday lenders target:
younger consumers with limited understanding of
finances
consumers who are deeply in debt
consumers who are struggling to meet their
day-to-day financial obligations
those who have a history of using high-risk
lenders
Examples of Payday Lenders' Fees
200cash.com will advance you $200 for up to 15
days for a fee of $60. You can get up to four
15-day extensions for $60 each (for a total of
$240 in fees). If the fees cause you to have
insufficient funds in your bank account, you'll be
charged a $25 returned check fee by the company in
addition to your bank's returned check fee.
How Do Payday Loans Work?
Typically, you request a payday loan for a short
period of time, usually one to four weeks. You
show proof of employment and identification and
write a postdated check for the full amount of the
amount you borrowed plus the payday loan fee,
which you leave with the lender. The fee may seem
reasonable: $15 to borrow $100 for two weeks, for
example. However, the annual interest rate on that
loan is 360 percent. It may seem worth it if
you're in a bind, but people often extend the loan
month after month and end up paying grossly
inflated annual interest rates and end up in worse
shape than when they borrowed the money in the
first place.
Are Their Options to Payday Loans?
The US Federal Trade Commissions recommendation
is to avoid payday lenders. They recommend these
alternatives for safer and less expensive loans:
Contact a local credit union for a small loan.
Ask for a pay advance from your employer.
Consider a loan from family or friends and get the
terms of the loan in writing.
Use a credit card advance.
Request additional time to pay the bill from your
creditors instead of taking a payday loan.
Find out what your options are before you need a
short-term loan.
Look into overdraft protection on your bank
account so if you don't have enough funds to cover
a check you write, the bank will pay the check and
you'll avoid insufficient fund fees and returned
check fees.
See credit counseling.
Plan ahead to prevent financial emergencies (see
below).
Prevent Financial Emergencies
Take a close look at your income and expenses.
Track where your money goes and find ways to save.
It only takes small amounts in a number of
different areas to add up to enough to build a
small savings account that you can turn to in a
bind instead of turning to high-rate lenders like
pay day loan companies.
If you need help preparing a budget, see Budgeting
101 for easy-to-read articles about getting
motivated, simple steps for setting up a budget,
sample budget worksheets, ideas for finding ways
to cut costs and save money, and more.
The Darker Side of Payday Loans
Payday loans are deceptive. Since you're forced to
turn over a postdated check, you may be harassed,
threatened, or subjected to collection practices.
The payday lender may deposit the check before the
date you agreed on, causing your check to bounce
and forcing you to pay more fees. Because people
who use payday lenders are usually in desperate
financial situations already, they may have
trouble repaying the original loan and they
continue to extend it until they've paid more in
fees than the amount of their original loan.
The high rates of payday loans make it difficult
for many borrowers to repay the loan because they
are already in a desperate financial state. They
keep extending the loan and end up paying more in
fees than they originally borrowed, putting them
in worse financial shape than when they started.
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