Payday Loans

There’s no denying that those voices on the radio, faces on the TV screen or words at the top of internet web pages telling you to get a payday loan are pretty tempting. You get a small, short-term loan—usually just enough to hold you over until payday—and pay it back when you can. Payday loans are much simpler thank bank loans, for example. But be careful: they’re not necessarily cheaper. A recent federal consumer report urges borrowers to weigh the pros and cons of payday loans before deciding to go for one.

Payday loans are also called:

• cash advance loans
• check advance loans
• post-dated check loans
• deferred deposit check loans

A typical payday loan requires a borrower to write a personal check to the lender (usually a finance company or check casher) for the amount they need to borrow, plus a fee specified by the lender. Fees are usually either a percentage of the original amount of the check, or they are charged per amount borrowed (for example, a fee for every $50 or $100 loaned). The lender then gives the borrower the amount specified in the check, minus the fee. The borrower repays the amount, plus the fees. If the borrower extends the loan beyond an agreed-upon deadline, he or she pays a fee for the extension.

If you decide to go for a payday loan, be sure to get the finance charge, in dollars, and the annual percentage rate or APR (the cost of credit on a yearly basis) in writing. The Truth in Lending Act requires this.

So far, payday loans sound good, right? Well, be sure to keep in mind that payday loans are expensive. Imagine, for example, you write a personal check for $115 to borrow $100 for up to 14 days. The payday loans lender holds the check until your next payday. Once payday arrives, the lender deposits your check, you cash in the check by paying the $115 in cash, or you roll-over the check by extending the loan for another two weeks—and paying a fee in order to do so. According to this example, the cost of the initial loan is a $15 finance charge and 391 % APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.

Before you jump at the first payday loan offer you hear about, weigh a few other options. Shop around to find the best credit offers. Seek out the credit offer with the lowest APR. Options might include a small loan from your credit union, an advance in wages from your employer, or a loan from family or friends. If you research hard enough, you might even find local organizations willing to make small business loans to individuals in need of credit.

You can also look into a credit card cash advance, but the interest rates tend to be high when you go with this option. To determine which credit offers are available at the lowest cost to you, compare the APR and the finance charge which includes loan fees, interest and other types of credit costs).

Other options include arranging for more time to pay your bills (note that a fee might come with this option), budgeting well, and avoiding all unnecessary purchases, no matter how small they seem. Maintain a savings account for emergencies and unexpected expenses. Seek credit counseling to help you devise a plan to pay existing debts.

If, after weighing all your other options, you decide that payday loans are the best choice for you, be sure to borrow an amount that you can afford to pay off with your very next paycheck, and still maintain enough funds to hold you over till the payday after that.