Understanding Payday Loans
With the recent news coming out of California regarding illegal practices with certain payday loan companies, it’s probably a good idea to remind yourself of the dangers this type of lending can impose, and to learn how understanding payday loans can keep you from potentially finding yourself in a really difficult financial pickle.
What exactly is a payday loan?
In essence, it’s a short-term, high-interest loan. Basically, the way it works is that you borrow money against your next paycheck and must pay weekly interest rates to the lender, which are typically at a very high rate. If you miss a payment, you must file for an extension and pay a fee. The amount of a typical payday loan can range from $100 to $1,000, depending on state regulations.
On average, a loan term length lasts about two weeks. Loans can cost up to 400% annual percentage rate (APR) or more, and finance charges to borrow say $100 for example, can range from between $15 to $30. For two-week loans, these finance charges result in interest rates ranging from 390% to 780% APR. Though not all payday loan practices are illegal, it is still important to know the laws surrounding them.
What you should know:
- Annually you could pay as much as 250%.
- There is high rate of recidivism debt associated with these types of loans because lenders don’t conduct a full credit check or ask questions to determine if a borrower can actually afford to repay the loan.
- Many consumer groups warn against taking out payday loans with interest rates higher than 36%.
- In many cases, the amount of the loan that people borrow actually increased over time.
- Payday loan regulations vary from state to state.
- Many internet payday loans carry inherent risks. Often, they are structured to automatically renew every pay day, with the finance charge electronically withdrawn from the borrower’s bank account.
- If a loan is not paid and a check is returned, this can cause negative credit ratings on a consumer’s credit report.
What are some alternatives to payday loans?
Whatever alternative you choose, make sure that it has at least a 90-day repayment term and does not require you to put up an unfair level of collateral such as the title to your car.
Payment Plan with Creditors
Consumers are often unaware that their creditors may make temporary concessions if customers are unable to make their credit payments on time. Many creditors will negotiate partial payments a plan is worked out between the customer and the creditor to pay off bills over a longer period of time.
Credit Union Loans
If you are a member of a credit union, you’ll find that many credit unions offer small, short-term loans to their members. Some of these credit unions also offer free financial counseling and provide loans at very low interest rates.
Emergency Assistance Programs
Many emergency assistance programs (EAPs), such as faith-based groups and community organizations, provide help, either directly or through social services programs.
Consumer Credit Counseling
Consumer credit counseling agencies throughout the country such as Clearpoint Credit Counseling Solutions help consumers identify and resolve the source of their financial concerns or, if needed, set up a debt management program with creditors. These services are available at little or no cost and can provide significant insight and an action plan. Learn more about our signature credit counseling service to get started.