October 25, 2010

Payday Loan Facts

You have probably seen the ads on the radio, television and the internet. You may have even received ads in the mail. They refer to payday loans, which can come at a high price.

If you are not sure that you are ready to take a payday loan, there are other options for you to think about in regards to handling your finances. Payday loans are great given specific circumstances, but taking them out frivolously can be dangerous. If you are having problems with your finances in general, a payday loan will not help you there.

Check cashers, finance companies, and others are making small, short-term, high-rate loans that go by a variety of names: payday loan, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.

Typically this loan involves a borrower writing a personal, post-dated, check to the lender for the amount he/she wishes to borrow. The company gives the borrower the money minus the fee.

Fees that are charged for payday loans are usually a percentage of the face value of the check or a fee per amount borrowed, for instance for every $50 or $100 loaned. If you happen to extend or rollover the loan, you will pay extra fees for each extension.

Under the Truth in Lending Act, the cost of payday loans – like other types of credit – must be disclosed. Among other information, you must receive, in writing, the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis).

These loans are great for specific circumstances. This would include emergency bills that are otherwise going to be charged late fees or to prevent certain services from being turned off.

Perhaps you are going to be charged huge late fees to a creditor if you don’t make your next payment. But this next payment falls in-between your paychecks. If this is your situation, then it is wise to know that you can pay the loan back when you get your next payday.

Otherwise, if you are too broke to pay your bills, then you need more financial help that a payday loan can give you. Auto repairs are another situation when a payday loan can help. But unlike traditional lenders, payday lenders don’t need to know why you are borrowing the money.

Alternatives to Payday loan

There are other options. Consider the possibilities before choosing a payday loan:

When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest APR – consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or friends.

A cash advance on a credit card also may be a possibility, but it may have a higher interest rate than your other sources of funds: find out the terms before you decide. Also, a local community-based organization may make small business loans to individuals.

Compare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost.

Ask your creditors for more time to pay your bills. Find out what they will charge for that service – as a late charge, an additional finance charge, or a higher interest rate.

Setting a Budget

Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases – even small daily items. Their costs add up.

Also, build some savings – even small deposits can help – to avoid borrowing for emergencies, unexpected expenses or other items. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies.

Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the funds in your account and if you make a mistake in your checking (or savings) account ledger or records, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection.

If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers.

These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.

If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.

Do you want to know more about debt and how you can make smart financial decisions now that will help you secure a more prosperous financial future? Sign up for our newsletter for monthly money tips.

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