|By Lacy Gallagher on September 6, 2011
“Keep you afloat between paydays” loans are advertised in a vast amount pop-ups and multiple of junk mail advertisements still crowding our mailboxes. However, these short-term, high-interest loans actually are high cost and only worsen the effects of the paycheck-to-paycheck lifestyle in the long run.
This type of loan works by the borrower writing a personal check or signing an electronic transfer agreement to the payday loan lender for the amount of the loan plus the fee for borrowing. The lender then gives the borrower the amount of the check minus the fee with the understanding that the borrower will be able to pay off the loan at the time of their next paycheck. The fee may be a percentage of the loan or a set price for increments of the amount borrowed—for example, a fee for every $50 or $100 of the loan. If the borrower is unable to settle the loan at the time of the next paycheck, then new fees are charged each time that the loan is extended. Lenders of payday loans must oblige with federal Truth in Lending Act and make known the finance charge fee (a dollar amount) and the annual percentage rate (APR—the cost of credit on a yearly basis) in the written agreement prior to signing.
The rolling-over of these loans is how the price of borrowing small amounts of money climbs high quickly, so consumers are advised to consider alternatives before signing on the dotted line of a payday loan.
Payday loans should be avoided, but if it is unavoidable then limit the amount of the loan to what can be paid back on the next payday to prevent escalating rollover fees.
- Small loans from your credit union or small lending companies and cash advances on credit cards are other borrowing options that may cost a more reasonable amount.
- Shop around for the lowest priced credit offer. Compare the APR and finance charges for the various options.
- Contact the creditors or bill collectors that you are having difficulty paying to the point that you are seeking a payday loan. Companies are willing to work with customers and may propose an extension or a payment plan. Make yourself aware of the charges for the service, such as late fees, an additional finance charge or a higher interest rate.
- If your debt is becoming overwhelming, seek guidance from a credit counseling service. There are non-profit organizations that offer no- or low- cost planning of debt repayment.
- Create a realistic budget and avoid unnecessary cost, no matter how low, on products such as a cup of coffee that can be made at home for a fraction of the cost. Savings should be a portion of the budget because the presence of a saving account can prevent the need to borrow when emergencies arise.