Saturday, April 28, 2007

A Payday Loan Question and Answer

By Paul Rizzo
Payday Loan Writer

The following is a question submitted to consumer advocate, Mike Boguslawski:

Q: I borrowed some money for taxes from a payday advance lender. I was in a hurry, desperate, and did not do the math.

Now I have to keep “rolling” the amount I owe, which costs a fortune, and I cannot pay off the principal because of all the fees that I spend on “rolling” the loan. Is there anything I can do to bring the quick cash loan payments down or make the lender agree to a lower interest rate?

A: I have noticed that the frequency of advertising for no faxing payday loans seems to have increased during the past two months. Maybe that is because those “lenders” know people are vulnerable at tax time, or maybe I am just more aware of them when my pockets are empty.In any case, I have always avoided them and recommend everyone else does too, unless there is absolutely no other source of money and you cannot possibly wait.

These really should be called “quicksand loans” because once you step into them, it is almost impossible to get out without a little help.

Payday Loan Q&A For that reason, payday cash loans with triple digit interest rates are illegal in Connecticut. Nevertheless, they are still available over the Internet, and I’m guessing that’s where you found one.

The payday loan industry has come under a lot of fire from legislators who don’t like the high interest rates, but lenders do not mind because their profit margin is so ridiculously high. For example, check-based loans of $100 to $500 typically cost triple digit interest rates, which can be as high as 780 percent annual interest rates for two-week loans with $15 to $30 per $100 loaned, according to the Consumer Federation of America.

The real problem with these personal loans is that many borrowers cannot repay them within two weeks, so they have to use their next check to borrow enough to repay their first loan. Of course, all the fees associated with the original loan are also charged on the renewal loan.

One secretary in my office is up to renewal loan number- 16. She has effectively been paying about $40 per pay period for the use of $250 during the last eight months, which means she has paid $640 for the use of $2500, but she still owes the original $250. None of her payments have gone toward the principal. That means an annualized interest rate of 384 percent. That is a deal, according to the Consumer Federation of America statistics, but it is not a deal any consumer wants to make.

The relationship between you and the payday cash advance lender is contractual and, if you did obtain the loan from a Connecticut-based payday lender, you probably have an illegal contract on your hands. That might come in handy if the lender sues you, because a court ordinarily will not enforce an illegal contract.

If the loan was made over the Internet, then things become more complicated, particularly if the contract had a jurisdiction clause from another state that permits payday loans. In any event, the question of illegality only comes up if you are in court. If you plan on repaying the loan, you need another strategy.

One approach is to discuss the interest rate with the quick payday loan lender and see if there is some accommodation it can make. It is not like these guys are Santa Claus, but they can lower your rate and still make oodles of money. The secretary I mentioned now has “Platinum” status - a level to which no consumer should aspire with a payday lender, but it is good for her because it has cut her renewal fees in half.

Another approach is to use a credit card cash advance. For example, a credit card cash advance of $300, borrowed and repaid in one month, costs between 50 percent and 80 percent in interest. Better yet, you can pay it down without incurring renewal fees.

Credit cards maxed out? A small loan from an established consumer lender for the same amount and time period costs only 36% in interest. You also can pay a consumer loan down without renewal fees.

Can’t qualify for a consumer loan? Not surprising. You probably would not have borrowed the money from a payday lender if you had room on a credit card, or enough credit to borrow from an established lender.

If that is your situation, you have no choice but to pay down the personal loan gradually by whatever means you can and simply not make this mistake again. Usually, you can decrease the principal balance by increments of $50.

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