smartconsumer: Knowing the Cost of Payday Loans - Know

Knowing the Cost of Payday Loans

{What to Know} {What to Do}


{bad guy} Ads for payday loans, cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans are everywhere. They say that for a small fee, you can borrow enough to make it to your next pay day. But these small, short-term, high-rate loans come at a very high price. People who borrow this way are often never able to get out of debt.

How these loans work

A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The lender gives the borrower the cash amount of the check minus the fee, and agrees to hold the check until the borrower’s next payday. Sometimes, with the borrower’s permission, the lender deposits the borrowed cash — minus the fee — into the borrower’s checking account electronically. Then the borrower debits the borrowed amount from the lender’s bank account on the next payday.

The fees on these loans are often a percentage of the amount borrowed. Or, flat fees can be charged depending on the amount borrowed.

Payday loans are very expensive credit. For example, you need to borrow $100 for two weeks. You write a personal check for $115. The $15 is the lender’s fee. The lender agrees to hold your check until your next payday in two weeks. When that day comes around, the lender deposits the check and you have paid $115 for a $100 two-week loan.

If money is still tight, you can roll over the loan for another two weeks, but you will be charged $15 more. When you finally pay up, you will have paid $130 for a $100 loan for 30 days. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of several hundred percent!

The federal Truth in Lending Act treats payday loans like other types of credit: the lenders must disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and the annual percentage rate (APR — the cost of credit on a yearly basis) in writing before you sign for the loan. The APR is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your loan.

Content Last Modified on 2/28/2013 10:28:33 AM