Payday Loans are usually considered
for the purpose of short-term money. These loans are especially
suitable for people who do not have satisfactory credit
rating. Payday loans are actually short-term loans that
are taken against earnings and are required to be paid back
as soon as the paycheck is received. The borrower is required
to fulfill certain characteristics, so that he becomes eligible
for this kind of loan. Proof of earning of at least three
months along with the proof of age being above 18 years
is required to be submitted to the insurance company. This
kind of loan is best suited for emergency purposes, but
not suitable for making it a long term or a regular source
of finance.
Secured Loans are more suitable for long-term purposes:
Secured loan is also another option for those people, who
have a poor credit rating. Since this is a secured loan,
it is more suitable for those who have a home. The process
is quite similar, as the lenders just lend money against
the equity in a home. The home can be either mortgaged or
fully owned, but the loan is provided on the basis of such
a home. The interest rates on such loans are usually low
and the repayment periods are too long. There are loans
that may be repaid in a long time period even extending
up to 30 years. The representatives of the lending company
assess the house, on the basis of which the loan is provided,
in order to decide on the valuation of the asset. There
are many lenders, who lend as much as 125% of the valuation
of the house, others may settle at 85% of the equity value.
The Negative Equity Trap
The main problem that exists with the loan is that the interest
rates of the loans may rise and fall with the value of property.
In case of the property value dropping, there is a rise
in interest rates and the homeowners find themselves trapped
in a negative equity. This negative equity has the effect
of increasing the amount of repayments. This is not good
for the financial health, and has can damage the credit
rating of the borrower.
"GET CASH UNTIL PAYDAY!
. . . $100 OR MORE . . . FAST."
The ads are on the radio, television, the Internet,
even in the mail. They refer to payday loan - which
come at a very high price.
Check cashers, finance companies and others are making
small, short-term, high-rate loans that go by a variety
of names: payday loan, cash advance loans, check advance
loans, post-dated check loans or deferred deposit check
loans.
Usually, a borrower writes a personal check payable
to the lender for the amount he or she wishes to borrow
plus a fee. The company gives the borrower the amount
of the check minus the fee. Fees charged for payday
loan are usually a percentage of the face value of the
check or a fee charged per amount borrowed - say, for
every $50 or $100 loaned. And, if you extend or "roll-over"
the loan - say for another two weeks - you will pay
the fees for each extension.
Under the Truth in Lending Act, the cost of payday loan
- like other types of credit - must be disclosed. Among
other information, you must receive, in writing, the
finance charge (a dollar amount) and the annual percentage
rate or APR (the cost of credit on a yearly basis).
A cash advance loan secured by a personal check - such
as a payday loan - is very expensive credit. Let's say
you write a personal check for $115 to borrow $100 for
up to 14 days. The check casher or payday lender agrees
to hold the check until your next payday. At that time,
depending on the particular plan, the lender deposits
the check, you redeem the check by paying the $115 in
cash, or you roll-over the check by paying a fee to
extend the loan for another two weeks. In this example,
the cost of the initial loan is a $15 finance charge
and 391 percent APR. If you roll-over the loan three
times, the finance charge would climb to $60 to borrow
$100.
Alternatives to Payday loan
There are other options. Consider the possibilities
before choosing a payday loan:
When you need credit, shop carefully. Compare offers.
Look for the credit offer with the lowest APR - consider
a small loan from your credit union or small loan company,
an advance on pay from your employer, or a loan from
family or friends. A cash advance on a credit card also
may be a possibility, but it may have a higher interest
rate than your other sources of funds: find out the
terms before you decide. Also, a local community-based
organization may make small business loans to individuals.
Compare the APR and the finance charge (which
includes loan fees, interest and other types of credit
costs) of credit offers to get the lowest cost.
Ask your creditors for more time to pay your bills.
Find out what they will charge for that service - as
a late charge, an additional finance charge or a higher
interest rate.
Make a realistic budget, and figure your monthly and
daily expenditures. Avoid unnecessary purchases - even
small daily items. Their costs add up. Also, build some
savings - even small deposits can help - to avoid borrowing
for emergencies, unexpected expenses or other items.
For example, by putting the amount of the fee that would
be paid on a typical $300 payday loan in a savings account
for six months, you would have extra dollars available.
This can give you a buffer against financial emergencies.
Find out if you have, or can get, overdraft protection
on your checking account. If you are regularly using
most or all of the funds in your account and if you
make a mistake in your checking (or savings) account
ledger or records, overdraft protection can help protect
you from further credit problems. Find out the terms
of overdraft protection.
If you need help working out a debt repayment plan with
creditors or developing a budget, contact your local
consumer credit counseling service. There are non-profit
groups in every state that offer credit guidance to
consumers. These services are available at little or
no cost. Also, check with your employer, credit union
or housing authority for no- or low-cost credit counseling
programs.
If you decide you must use a payday loan, borrow only
as much as you can afford to pay with your next paycheck
and still have enough to make it to the next payday.
To Complain/For More Information
If you believe a lender has violated the Truth in Lending
Act, file a complaint with the FTC.
The FTC works for the consumer to prevent fraudulent,
deceptive and unfair business practices in the marketplace
and to provide information to help consumers spot, stop,
and avoid them. To file a complaint or to get free information
on consumer issues, visit www.ftc.gov or call toll-free,
1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.
The FTC enters Internet, telemarketing, identity theft,
and other fraud-related complaints into Consumer Sentinel,
a secure, online database available to hundreds of civil
and criminal law enforcement agencies in the U.S. and
abroad.
February 2000
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