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Payday is a week away and Sam's account balance is at or near zero.
Sam solves the problem with a 'pay day loan.'
Sam writes a personal check to a 'lender.' The lender gives Sam the money, minus a service fee. The lender holds the check for a period of time, usually two weeks or a month ("till pay day"), then cashes the check.
Some people know pay day loans by other names -- cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.
Whatever they are called, they are a first-rate rip-off.
How much do pay day loans cost? Of all types of loans, pay day loans are the most expensive. Lenders charge between $15 and $50 for each $100 borrowed during each loan period. For example, if you wrote a check for $115 to borrow $100 (the fee is $15) for up to two weeks, the actual interest rate you are paying is 391 percent. By comparison, the average credit card interest rate is about 21 percent.
What choices are there when pay day arrives? (1) The check is cashed; (2) the full amount is paid to the lender in cash and the check is returned; or (3) the amount is "rolled over" by paying the fee again to extend the loan for another two weeks or a month. Rolling over pay day loans increases the annual interest rate paid, and fees paid can quickly be more than the amount borrowed.
What are other options for a loan? If you need credit, shop carefully for other options, such as for a bank, credit union or finance company loan. Compare interest rates and fees to see which will cost you the least. Use a credit card, borrow from relatives or get an advance from your employer. Ask creditors for more time to pay the bill(s). Make a realistic budget and make sure you are not spending more each month than you make. Extension offices can provide information about setting up a budget. Consumer Credit Counseling Service can help individuals set up a payment plan for creditors in addition to providing budgeting information.
What about existing pay day loans? Consumer Credit Counseling Services does not recommend rolling over pay day loans. Instead, try to have enough money in your checking account so the check can be cashed and the loan paid. If not enough money is available to keep the check from bouncing, write the lender a letter asking that he or she not cash the check but instead accept a monthly payment arrangement to pay off the loan balance. Keep a copy of the letter. If the lender will not agree to a reasonable payment plan and the check bounces, again try to set up a monthly payment arrangement. If the lender goes to court for a judgment, show the judge the letter and explain that effort was made to set up a payment plan but the lender wouldn't work with you.
A good reason to avoid pay day loans! Consumer Credit Counseling had one client who had 15 payday loans outstanding at one time. The amount he received from the loans was $2,425. To maintain the loans, he was paying total monthly fees of $665. Over the course of one year, this would have amounted to $7,980 in fees. This works out to an average yearly interest rate of about 330 percent. If this individual had used a credit card to get the $2,425 and paid 18 percent interest on the balance, the total interest payment for the year would have been about $437 or $37 a month. Using pay day loans was about 18 times more expensive than using a credit card. In both cases, remember that the original balance of $2,425 is still owed.
For information about this topic, contact Jan Nixon, Colorado State University Extension agent in Logan County, Colorado - phone: (970) 522-3200 or e-mail at jnixon@coop.ext.colostate.edu
or contact your local
Colorado State University Extension office.
(Information adapted from materials provided by Consumer Credit Counseling Service.)
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