Consider the options – talking to a creditor about extending your payment deadline at little to no fee, or taking out a payday loan with high fees and interest rates.
States with high or no rate limits tend to have the most payday loan stores per capita, while states with limits have fewer stores serving more customers each, the study states which means payday credit is not constrained in those states.
Among states with storefront advance-pay lenders, the lowest average interest charged is Colorado at 129 percent, which matches its legal limit. The next lowest are Oregon at 156 percent and Maine at 217 percent.
According to the Federal Trade Commission (FTC), check cashers, finance companies and others are making small, short-term, high-rate loans that go by a variety of names: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.
With payday loans, a consumer writes a check payable to the lender for the amount he or she wishes to borrow plus a fee. The lender gives the borrower the amount of the check minus the fee. The lender holds the check until the borrower’s next payday, when he or she can do one of three things: allow the check to be cashed, redeem it by paying cash to recover the loan plus a fee, or roll it over by paying the fee to extend the loans for two or more weeks. Fees charged for payday loans are usually a percentage of the face value of the check or a fee charged per amount borrowed (typically lenders charge anywhere from $15 – $50 dollars for every $100 borrowed). Obtaining a payday loan can be very expensive. Driven by the need. Problems often begin when the consumer is unable to pay off the debt and must extend the loan. These roll-overs come with a very expensive fee for extending the debt often ending with the borrower paying interest rates as high as 400%.
Consumers should be extremely cautious when considering loans either from an online business or a neighborhood loan office. Payday loans can trap borrowers in a revolving door of debt that can be difficult to escape. When borrowers discover their loan repayments leave them unable to meet their bills, they are forced to take out more payday loans.
Under the Truth in Lending Act, payday loan costs – like other types of credit – must be disclosed. Among other information, a consumer 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).
BBB, along with FTC, advises consumers to consider other possibilities than a payday loan:
- If you need credit, shop carefully. Consider a small loan from your credit union or a small loan company, an advance on pay from your employer, or a loan from family or friends.
- Ask your creditors for more time to pay your bills. Find out what they will charge for that service – as a late charge, an extra finance charge, or a higher interest rate.
- Make a realistic budget, and figure your monthly and daily expenditures. Build some savings – even small deposits can help – to avoid borrowing for emergencies, unexpected expenses or other items.
- 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 that offer credit guidance to consumers for little or no cost.
- 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 funds to make it to the next payday.