Payday Loans: “Just Say No”

Payday loans are touted by media ads as a short-term solution to meeting unexpected expenses. Generally consisting of a relatively small loan or cash advance designed to be repaid by the customer’s next pay check, usually in two weeks. The customer writes a post-dated check for the amount of the loan plus fees. The payday lender gives the customer cash and holds the check until the two week period has expired. If the customer has not returned to repay the loan, the lender deposits the check. Sounds fair enough. But is it?

True cost of a cash advance

Let’s start with those fees. Usually between 15% -30% of the amount borrowed, this means the customer borrowing $300 will write a postdated check for $345 – $390. This amounts to an annual percentage rate of 390% – 780%. Still sound fair? But there’s more. What if that postdated check is deposited and the customer doesn’t have sufficient funds to cover it? They will incur an additional fee, usually around $30, from their banking institution. If this fee causes other checks to bounce the charges can quickly spiral out of control.

Don’t payday lenders provide a way to avoid this?

As a “solution” to this problem, payday lenders will often allow a customer to stop by the office and pay an additional service fee, again 15%- 30% of the original amount borrowed, to “roll over” the loan for an additional two weeks. This “solution” means the customer has already paid between $90- $180 in fees to borrow $300 for one month!

Alternatives

And who are the targeted customers for this so-called “helping hand”? Usually those of very modest incomes who can least afford to be taken advantage of in this way. Not coincidentally, they are also those with the least clout when it comes to demanding consumer protection. But there is hope.

Some states have banned payday lending, or made the loans impractical by severely limiting interest rates. But does removing this option mean that someone who needs help simply has nowhere to go? No, it doesn’t.

Some financial institutions, especially credit unions, have established short-term lending programs to fill this gap. Often without the need for a credit check, borrowers can obtain a small advance at a reasonable rate, with a repayment term they can actually meet. These small loans have the added benefit of providing the borrower a reported credit history, something payday loans do not.

So, if you find yourself in need of short-term help – contact your bank or local credit union. There are options out there. Don’t fall into the hands of predatory payday lenders.

What’s Behind a Credit Report?

We all hear about credit reports and how important they are to you. The better yours is, the more money you can save if you need a loan or any other type of credit. Even insurance companies are now taking a look at credit reports when deciding on your premiums for the year. Let’s face it, we are not considered people anymore, we are considered a number – and that number is our FICO score.

It’s important for you to know what’s on your credit report. Identity theft is on the rise, and you want to be sure you haven’t become a victim. Even simple things can show up, a store might have made an error, a bill maybe never made it to your new address, the reasons could be endless. Most Americans have no idea on what’s listed! You are entitled to a free report every year, from each of the three major reporting companies, which include Equifax, Experian and TransUnion.

What are scores and what do they mean? A score at its lowest starts at 300. If your number falls in between 300 and 549, chances are you’re not going to be able to get that loan you were hoping for. You are considered a very high credit risk. Sometimes, it can be as simple as not having any credit; it doesn’t mean that you haven’t paid your bills.

From 550 to 699, you are considered a medium risk. You might get the loan, but you will most likely have to pay a higher interest rate. From 700 to 850, you should have an incredibly smooth loan process and you’ll receive the best interest rates.

Several different things, including no history of debt, high debt compared to income and your payment history, can determine your score. What helps is if you pay your bills on time, only hold 2-3 credit cards and keep the balances below the limit. Paying more than the minimum due will also help. Establish a long term credit history if you can.

What will hurt you is if you have too many credit cards or none at all. High debt and delinquent accounts, bankruptcy and charge offs are some of the worst to have.

If you have bad credit, don’t despair. It won’t follow you around forever if you start on the right track today to get it straightened out. Do your best to pay your bills on time, and make sure you get your annual credit reports so you know what is on there. Know your score, and do your best to maintain and improve it. While I’m not advocating taking out loans, a fact of life is sometimes we need them!