MoneyMix assistant editor
It's Friday, you don't get paid until Monday, and you need cash to get through the weekend. You spot a place with bright lights spelling out "Get Cash Here!" Easy, right? You go in, write a check, and walk out with money in hand.
Hold on. Let's look at what's going on here.
The payday lending business has exploded in recent years, but payday lenders are not out to help you. They're out to make a lot of money, and you're a target.
what's a payday loan?
When you take out a payday loan (also known as cash-advance loans, postdated check loans, or delayed deposit loans), you write a postdated personal check to a payday lender for the amount you want to borrow—plus a fee. You and the payday lender both understand there are insufficient funds, at that time, to clear the check. The payday lender holds the check until your next payday, at which time you can:
- Redeem the check with cash or a money order;
- Allow the check to be deposited; or
- Renew—or roll over—the loan, by paying an additional fee.
You might think it's OK to pay a fee to borrow money, so what's the big deal? The problem is that, when stated as an APR (annual percentage rate), the fees for payday loans are astounding. The APR expresses what you pay—on top of the amount you borrowed—for the privilege of getting the loan.
You hate to admit it but you're stuck this month—you've got rent and utilities to pay and zip in checking until payday.You know that payday lenders are bad options, so what can you do? Here are some options to consider. They may not be easy, but they are better than digging yourself into a hole with payday loans:
• Don't assume the credit union lender will say no. Ask if you qualify for a short-term personal loan, and you might get some useful advice in the bargain that will help you plan better in the future.
• Can you borrow money from your family or friends, with repayment terms spelled out in writing?
• Can you work with your landlord to negotiate some extra time to pay your rent?
• Have you contacted the companies you owe money to and explained your situation?
• Can you put your electric bill on a credit card or set up a payment plan?
big bad fees
Payday lenders frequently charge fees for each $100 borrowed. Let's say you're a little broke and need $400 to pay your rent. The payday lender you visit charges $20 for each $100 you borrow. You'll write a check for $480 (400 + [20 x 4] = 80) and date it for your next payday, two weeks from now. You just paid an effective APR of 520%. That's huge. Compare that with 22% APR for credit card cash advances, or even the 36% some small-loan companies charge.
roll over, fido
The dollar cost for payday loans escalates if you renew, or roll over, the loan. Before long, the escalating charges dwarf the original balance. So, let's say you kept rolling that $480 two-week loan over for a whole year (another 25 two-week periods). You'd pay $520 in fees and still owe the original $480 you borrowed. Ouch.
how to avoid 'em
Everyone needs at least a few hundred dollars in a savings account for emergency expenses. If you do have to borrow, there are smarter solutions than payday loans. Licensed small-loan companies, secured credit cards, or overdraft protection on share draft or checking accounts, even if expensive compared with conventional personal loans, offer better terms than the triple-digit interest rates of payday loans.
That's why your first stop should be your credit union. The people there can help you look at other choices. Many credit unions offer short-term loan options without the enormous APRs attached.
Remember that a long-term spending plan can keep you from getting financially stuck in the first place. Consider working with a financial counselor to create a budget and spending strategy.
The National Foundation for Credit Counseling (NFCC) in Silver Spring, Md., has nonprofit Consumer Credit Counseling Service (CCCS) affiliates around the country ready to help anyone get back on track from financial difficulty.
The CCCS provides free or low-cost confidential consultations with professional budget counselors trained and certified by the NFCC. The service can arrange debt repayment plans between consumers and creditors and sometimes negotiate lower fees or reduced penalties on delinquent bills.
Your credit union might have someone on staff who can help or can connect you with professionals who can help. Once you learn simple planning strategies and use some tools, like direct deposit, you won't find yourself in this fix again.
You must be logged in to post comments.