Ballpark Estimate: $15 to $30 in fees for every $100 you borrow
If rising expenses leave you unable to cover your bills this month, you may be tempted to take out a payday loan. Payday loans are short-term loans (often lasting just a week or two) that serve as a cash advance on your next paycheck.
The way it works is that you contract with a lender who will provide you with the money you need in order to tide you over until you get paid. In exchange, you agree to pay a very high interest rate and to repay the money from your next paycheck, or roll the loan over and incur repeated fees and costs.
Payday loans can be a tempting way to get the money you need to pay your bills, but it is not quite as simple as it sounds. In addition to being an extremely expensive option (see the What it Costs section for more details on the high interest rates and/or related fees), it can also lead you down the path to deeper debt. This is because if you live paycheck to paycheck with little or nothing left over for extra expenses (which is typically the case when you need to take out such a loan in the first place), by the time you repay the loan and the related costs from your next paycheck, you may find yourself short again and be forced to take out another payday loan to try to catch up. This can become a vicious cycle that is difficult to break. In fact, one source points out that it is common for borrowers to renew a loan or take out a new one an average of 12 times or more a year.
Same Concept, Different Names
Payday loans are very readily available through a variety of lending agencies, finance companies and Internet businesses. You can do a search for these loans online or respond to advertisements offering these that are frequently played on the radio, on television, in newspapers and magazines. You may even receive offers for payday loans that come right to your home in the mail. While the avenues through which you can get payday loans can vary quite a bit, so can the names by which they are called. In addition to payday loans, they may be referred to as cash or check advance loans, post-dated check loans or deferred deposit loans. But while the names may sound different, the premise – and costs – can generally work in much the same way.
If you want to take out a payday loan, you will need to have a bank account. (You generally don’t need the account to be affiliated with the lending agency.) You will also need a job or other source of regular income, since this is what you are using to repay the loan (you will likely be required to show a recent pay stub as proof of your income), and you will need to be able to provide adequate proof your identity (such as with your driver’s license or passport).
Before you sign any paperwork for such a loan, you will want to know up front Cost For A Payday Loanexactly what the loan will cost you by the time you are through. The lender is required by law to disclose the terms of the loan, including the interest rate and/or fees involved. In addition, you should ask how the loan works and how repayment is arranged. For instance, some loans are set up to automatically renew and the charges are automatically deducted from your checking account, while others require you to write a check to cover the loan, which will then be cashed on your payday to pay the loan and fees back. In addition, if you don’t have enough money in your account on payday to cover the amount plus fees, you can face additional charges for a bounced check (or checks, since the lender has a legal right to try putting through the check or electronically debiting your account three times to see if the money will clear) and you will also incur additional fees from the lender for failing to make good on the loan.
Laws Vary By State
In addition to following federal lending regulations, payday laws are also governed by state laws. At the present time, most parts of the country do allow this practice to occur (although there are certain rules and restrictions enforced in some states). To find out if payday loans are allowed in your state, visit PayDay Loan Consumer Information and browse the state information by state. You can also view a more in-depth rundown of the terms and limitations in each state through the National Consumer Law Center’s Summary of State Laws.
You will notice that the amount of the loan allowed, the cap on the interest rate, the length of repayment and what recourse lenders have if you don’t repay the loan varies from state to state. In addition, there are several states that prohibit payday loans entirely. However, residents in these areas can still access such cash loans via the Internet, which comes with its own set of costs and risks.
If you are tempted to turn to the Internet to borrow the money you need until your payday comes, experts advise you to find out more about what you are agreeing to before you finalize such an arrangement. Online loans can often be even more expensive than those you take out locally. Lenders are banking on the fact that the convenience will be worth the extra cost to consumers. In addition, when you provide your personal financial information online if it isn’t through a secure web connection, you can be putting yourself at greater risk for identity theft and other security problems.
What It Costs
The total costs for a payday loan depends on quite a few variables. The main factors that can affect what you will spend include where you live (since some states cap the interest rate, while others don’t regulate it at all), the type of lender you contract with (there are “low” cost lenders that charge a minimally lower interest rate than their counterparts, and Internet companies that may chare even more), how much money you borrow (the fees are often calculated on the total) and the length of the loan (the longer you have the money, the more it will cost).
With all of these variables that exist, you can assume a payday loan can cost you in the range of $15 to $30 for every $100 you borrow for a short time. It is also important to remember that each time a loan becomes due and you roll the balance over again, the fees is due again. This means that if you have a $400 loan for two weeks with a fee of $80 (which is $20 per $100), if you pay it off when it’s due, it will cost you $480 for the loan repayment and the fees. However, if it takes you twelve weeks (or six loan periods) to repay the balance, this can cost you a total of $480 ($80 x 6 loan periods) in fees, plus the original $400 you borrowed for a total of $880 due. So it means in the end you are paying more than double the amount you need.
Further, sources that track payday loans estimate that these fees can average in the range of 400 to 800 percent annual percentage rate (APR) on the amount you borrow. In some cases, the APR can be even higher. One expert even points to loans that charge as much as 1200 percent. But even with some of the more “average” interest rates, this is clearly one of the most expensive types of loans that exist.
However, if you live in a state that has a cap on small loans also called a usury cap, you may have some protection in place that limits what lenders can charge you for this money. The cap can be in the range of 24 to 48 percent APR, which is a significant difference.
If you need some extra money quickly to help you to cover your bills, you may want to pursue some other options and save a payday loan as your last resort. For instance, a cash advance on your credit card with high interest rates (such as at 30 to 50 percent APR) can be a lot less expensive than taking a payday loan in states without a cap on the interest rates. You may also be able to talk to your creditors and work out a payment plan or get a short-term loan from a local bank or credit union, which is often offered at more reasonable interest rates. When considering different loan or cash advance options, be sure to compare any fees, finance charges and APR to determine the full cost of the loan and make an educated choice.
Protection For Members Of The Military
The federal government recently put some important protections in place for members of the U.S. military to prevent lenders from taking advantage of them. Lenders can’t charge more than 36 percent APR and this amount must include all fees. But even with these restrictions, the price of a payday loan is still often not the most cost effective option to help make ends meet.
A Final Note
To learn more about payday loans and to find out your rights as a consumer, you can visit the Federal Trade Commission or call their hotline at 1-877-FTC-HELP.