Should you take out a payday loan? How are the fees calculated? An article from the Daily Times (the newspaper of the Eastern Shore of Delaware, Maryland and Virginia) examines the payday loan industry and breaks it down for consumers who may be curious about it.
From the basics of the payday advance business to a checklist for consumers, this column is worth taking a look at and the Times is happy to pass it along to you.
HOW PAYDAY LOANS WORK
Let's say you need $200 cash as of tomorrow, April 18, but your payday is in two weeks (May 2). A company will agree to give you a loan by the end of the business day, so long as you write a post-dated check (or agree to an instant wire transfer, if you use a faxless payday loan agency) for the $200 plus fees, due on May 2.
The rates of interest vary, but you're probably looking at 15-20 percent of the loan amount. In this case, $35-40. For the purposes of this example, let's say you owe $40, making the total amount $240.
HOW PAYDAY LOANS ARE REPAID
You can repay your loan by redeeming a post-dated check with cash or money orders, or let the payday cash loan company withdraw it from your account. Sometimes, however, people choose to roll over the loan — in other words, extending it until a later date. An additional fee is added onto the first loan, making your loan total $280 ($240 + $40). The loan can be rolled over multiple times before being due, with additional charges applied each time.
The true cost of payday loans, as a result, are these finance charges the company makes for lending you the money. Charges will vary based on the loan amount and the interest rate scale of the lender you choose. Be aware that a payday loan firm usually will quotes fees in dollar amounts, not rates on an annualized basis. Some will try to skirt the issue of the fees altogether. Be sure you get a straight answer from your agency!
WHAT HAPPENS IF YOU DON'T PAY?
This can be very problematic. If you do adhere to the repayment agreement, the company can cash the check from you, or attempt to withdraw the funds from your checking or savings account. If the check bounces, this will result in overdraft fees from your bank, and quite possible additional charges from the lender whose instant payday loans you borrowed. Writing bad checks is against the law and you can end up in legal trouble after multiple infractions.
IS A PAYDAY LOAN A GOOD IDEA?
There are plenty of circumstances that will make a payday loan seem like a good source of quick and easy cash. But the truth is that payday loans may push you further into debt if you are not prepared for the responsibility that they require. If you are considering applying for a payday loan, ask yourself (and the lender) these questions before you do:
- What are the total fees involved, the payback plan, and the penalties if you don't pay on time? Can you budget for this?
- Can you get money in a way that is less costly than a payday loan? Can you borrow from friends or relatives?
- Did you shop around for the best rates?
- Why do you need money for emergencies? How did this come about, and can it be avoided going forward? Do you have a savings account you can use to save up money for just such an occasion?
- Do you need to talk with a credit counseling firm to solve your financial problems?
- Can you incur a late fee from a utility company or another non-interest charging source instead?
Thinking things through with the help of these bulleted points will help consumers make the right decisions about payday loans. Good luck!