Payday loans: Quick cash at a steep price
They’re called many names: payday loans, cash advance loans,
check advance loans, post-dated check loans or deferred deposit
loans. What they are, though, are short-term, high-interest-rate
loans given to borrowers who need a little extra cash until their
next paycheck.
If you’re not familiar with this game, this is how it goes:
Generally, a borrower writes a personal check payable to the lender
for the amount borrowed — plus a fee, which represents the
interest. The lender pays the borrower the amount of the check
minus the fee, and holds the check — usually until the borrower’s
next payday. The same result can also be accomplished
electronically: The lender deposits the amount borrowed into the
borrower’s checking account, then debits the loan amount — plus a
fee — the next payday.
That fee will vary. Sometimes it’s a percentage of the face
value of the amount of the loan. Other times it is a set charge per
every $50 or $100 borrowed. Either way, these loans are known for
being a costly way to make ends meet. So costly, in fact, that
payday loans are banned or significantly restricted in 18 states
and the District of Columbia, according to the Center for
Responsible Lending. Some states have interest rate caps (often 36
percent or less); others don’t allow these loans them at all. The
average APR is 417 percent based on a 10-day loan. From bank
lenders, it is a little lower: 365 percent.
Why are they so controversial? The interest rate, for starters.
But payday loans also tend to suck borrowers in. According to CRL,
the average payday borrower takes out nine loans per year and
borrows more and more over time. Its report states that “payday
lending can lead to negative financial outcomes for borrowers;
these include difficulty paying other bills, difficulty staying in
their home or apartment, trouble getting health care, increased
risk of credit card default, loss of checking accounts and
bankruptcy.”
It’s clear that the primary trouble emerges when borrowers don’t
pay the money back immediately. Every time the loan is extended or
“rolled over,” new fees are tacked on (some states don’t allow, or
at least limit, rollovers).
Say you need to borrow $100 for two weeks and the fee is $15
(that’s an APR, annual percentage rate, of 391 percent). If, 14
days later, you’re not ready to pay it back, you’ll pay another
$15. Do this three times and you’re up to $60 on a $100 loan.
(Note: Loans offered to military personnel cannot have an APR
greater than 36 percent. This can still get pricey if you roll
over.)
Even if your state doesn’t allow payday loans, your bank may
offer a product called “checking account advance” or “direct
deposit advance” loans. They work in much the same way: Generally,
the bank deposits the loan into the customer’s account and then
repays itself the loan amount, plus a fee, directly from the
customer’s next direct deposit.
Nessa Feddis, vice president and senior counsel with the
American Bankers Association, says that these bank payday loans are
important in certain circumstances.
“Direct deposit advance loans are useful for people with
short-term, unexpected or emergency needs who can’t wait until
their next paycheck,” she says. “Unlike payday loans, direct
deposit loans have safeguards to keep the borrower from getting
into a cycle of debt with an ever-growing balance that can’t be
repaid. Outstanding balances must be repaid before the customer may
borrow again, and generally, they can only borrow for six
consecutive months. After that, the amount that can be borrowed is
gradually reduced to zero, almost always within a couple of
months.”
Those safeguards are better than nothing, for sure. But there
are better ways to get out of a jam:
• Use a credit card. Payday lenders are
required to disclose the APR in writing before you sign for any
loan. Compare that APR with other alternatives, like a credit card.
If you have one, even at a high rate of interest, you’re better off
than with a payday loan. Even a cash advance from your credit card
– also an expensive choice, and therefore a last resort — is
typically going to be cheaper than a payday loan.
• Overdraft protection. I’ve told people, again
and again, not to opt in for overdraft protection on their checking
accounts. Why? Because it’s expensive and you’re better off having
your debit card declined. But if you need to access funds and you
have no other way, overdrawing your checking account will cost you
around 18 percent interest. That’s far better than the APRs on
payday loans or direct deposit advances.
• Get a handle on your debt.
If you’re falling behind because a large portion of every
paycheck is going toward minimum payments on your credit cards, you
should seek help with a good credit counseling agency. And if you
are in a cycle of payday loans and you don’t see a way out, I urge
you to do the same. Find a good agency through the National
Foundation for Credit Counseling (www.nfcc.org).
• Try to break the cycle. The best way to stop
living paycheck to paycheck is having an emergency fund. Even if
you have $100 in a savings account at your local bank, it’s better
than nothing and can help you if you find yourself behind or in
need of some quick cash to cover an unexpected expense.
With Arielle O’Shea
(Jean Chatzky is financial editor of NBC’s “Today” show, a
contributing editor at More magazine and the author of “Money 911.”
She recently launched the JeanChatzky Score Builder in partnership
with smartcredit.com. Check out her blog at jeanchatzky.com and
follow her on Twitter @jeanchatzky.)
Article source: http://www.heraldextra.com/business/payday-loans-quick-cash-at-a-steep-price/article_fcd0418a-3cf1-5b82-8166-432b57183d4c.html
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