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!
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.