Pay Day Loans

A payday loan gets you the money you need until your next paycheck. It sounds great except that you do have to pay it back when you stated you would at the time of the application and that period is usually two weeks. Payday loans are fast and easily obtained but they can also get you into financial hot water.

Payday loans are governed in the U.S. by The federal Truth in Lending Act as are other types of loans. Primarily, at the federal level, the law requires that companies must disclose all terms, conditions and interest rates but does not address what those interest rates should be. However each state may legislate things like caps on the interest rates charged on payday loans. Currently, annual interest rates on payday loans are running between 400% and 500%! Ohio is one state that has recently introduced legislation for caps on payday loans and the federal government has already capped loans to military personnel at 36% APR.

A payday loan, or post-dated check loan, is like a cash advance from a credit card. For a payday loan, the borrower writes a check for the amount being borrowed plus a fee. The company deducts their fee and then gives back to the customer the balance in cash (or direct deposit to your bank account). If a person chooses to perpetuate the loan, that is to keep borrowing and paying back on a continuous basis (sometimes referred to as rollover), remember there are fees for every transaction with these payday loan companies.

So you know now that by law, payday loan companies are required to disclose information in writing about the amounts of any finance charges and the annual percentage rate charged. But most importantly, look at the interest rate on the loan combined with any other finance charges and you will find that the cost of taking a loan this way is extremely expensive. In a given example of borrowing $100 for two weeks, you write a check for $130 – that’s $100 for you and $30 in finance charges which means that for 2 weeks of borrowing $100 the annual interest rate is 600%!

Here are some tips on other ways to help you get over that financial tough time without having to take a payday loan:

If possible, borrow the money from family or friends and offer to repay the money on your next pay at a reasonable interest rate, say 5%.
Check with a local credit union who although is a lending institution often offers pretty good rates.
While interest rates on credit cards are very high and even higher on cash advances, it may still be less expensive to get a small amount of cash this way for a short time.
If you are having a hard time keeping up with your bills, talk to your creditors. You may be surprised at the help they may be able to give you in terms of month repayments and extending the duration of the loan. There will be finance charges but not at the levels of payday loans.
Try writing down all of your income and all of your monthly expenses and look for ways to cut down. Even small amounts of savings can add up and you are less likely to find yourself in a financial bind.
Overdraft or overlimit protection on your checking account can also help you during times of high unexpected expenses. You do pay a higher interest fee to the lender but again the interest rates will not be as high as that on payday loans.
If you rely on borrowing and overdrafts in order to make ends meet every month, you really should consider contacting a local consumer credit counseling service. These agencies are there to help protect consumers in financial trouble. There is light at the end of the tunnel as the expression goes.