Short on cash? Need just
a little more to get you through to payday? Step right up
and take out a payday loan. This increasingly popular line
of credit will provide you with the $100 or $200 you need to get
by until your next paycheck arrives. The price for this
easy cash? At most check-cashing outlets, only interest
rates from 261% APR (annual percentage rate) on up.
Alternatively known as
cash-advance loans, post-dated check loans, or delayed deposit
check loans, payday loans are a star product at check-cashing
outlets. Touted as a convenient financial Band-Aid, they
exact exorbitant fees from consumers, many of whom already are
in troubled financial straits.
Because of their triple-digit
interest rates, payday loans shouldn't be even the financial
choice of last resort, says the Consumer Federation of America
(CFA) in Washington, DC. By looking at the true price of
payday loans in comparison with other credit sources, consumers
can see the long-term financial benefits of avoiding such costly
A new profit
Payday loans are a relatively
new offering among check-cashing outlets, having broken onto the
scene within the past several years. "When the
government passed a law that all government payments had to be
made electronically by January 1999, it caught the attention of
check cashers," says John Caskey, an associate professor of
economics at Swarthmore College, and author of "Fringe
Banking: Check-Cashing Outlets, Pawnshops, and the
Poor." "The check-cashing outlets had to find a
new source of revenue. That resulted in a push to get into
So what are payday loans?
Typically, a customer writes a postdated personal check to a
check casher for the amount he or she wishes to borrow - plus a
fee. The customer and check casher both understand there
are insufficient funds, at that time, to clear the check.
The check casher holds the check until the customer's next
payday, say two weeks down the road, at which time the consumer
- Redeem the check with cash
or a money order;
- Allow the check to be
- Renew, or roll over, the
loan, by paying an additional fee.
The price is
What do customers pay for this
service? Companies frquently assess fees per $100
borrowed. For example, if the fee is $20 per $100, a
customer needing $100 would write a postdated check for $120,
dated 14 days down the road.
When stated as an APR, the fees
are astounding. According to a 2000 CFA survey of 230
payday lenders, the APR on a $100 loan borrowed for 14 days
ranged from 195% to 1092%. Compare that with 22% APR for
credit card cash advances, or even the 36% interest some small
loan companies charge.
Although payday loan lenders
must disclose the APR as part of the Truth in Lending Act, many
customers are shocked to learn what they've actually paid.
"Some of our members
thought it was a very legitimate, very easy, very convenient way
they could get an advance on their payroll check," says
Daniel Ige, president of the Ripon Community Credit Union.
"When they actually saw the figures we drew up for them as
far as the interest rate, they were appalled. They said,
had they known that, they not only wouldn't have taken out a
payday loan but would have tried to come to the credit union
The fees climb even higher if a
consumer renews, or rolls over, the payday loan. Before
long, the escalating charges dwarf the original balance.
"They're paying a lot of money for a very small amount of
credit," says Jean Ann Fox, director of comsumer protection
for CFA. "If they can't live until this payday
without borrowing, when they pay the loan back it will be just
as hard to live until the next payday."
What alternatives exist?
The CFA survey found that licensed small-loan companies, secured
credit cards, or overdraft protection on checking accounts,
while expensive, offer better terms than the triple-digit
interest rates of payday loans.
However, your first stop should
be Stark Federal Credit Union. "Credit unions are
very proactive in providing financial counseling for their
members," Ige says. "Members should feel free to
walk into a credit union to ask questions, gather information
and look at some of the other avenues available."
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