Payday Loan: Legalized Highway Robbery Or Real Financial Help?
by Vishy Dadsetan
Need extra money to get you to the next paycheck? Payday loans come to the
rescue. However, you should be prepared to pay the price which is usually
a hefty one. But there are steps you can take to minimize the financial damage.
What are Payday Loans?
Cash advance loans, post-dated check loans or deferred deposit check loans
are high-rate loans and are intended to be used for short term. Emphasis here
is on short term, usually 14 days since most of us get paid bi-weekly.
How does a Payday Loan work?
The old economy created the idea of living paycheck to paycheck. As if that
wasn’t bad enough. In today’s economy many don’t even get to the next paycheck.
So, the potential borrower writes a personal check payable to the lender for
the amount she wishes to borrow plus a fee.
The lender cashes the check and keeps the fee, of course. Ideally this type
of loan will get the borrower room to breathe and he/she can pay off the loan
when he/she gets paid.
Lets take a look at an example. Ms. Susan Borrower needs $200 and the cost
is $30. She writes a check for $230 and the payday lender agrees to hold the
check until her next payday that is usually 14 days away.
After 14 days, depending on the particular plan, Ms. Borrower takes $230.00
in cash to the lender and takes back the personal check she wrote. Or, she
can roll-over the check by paying a fee to extend the loan for another two
weeks. Each time she rolls-over the check, she will pay a fee that in this
example was $30. In theory, if she rolls-over the check for one year, she
ends up paying $30 for 26 times or $780 for borrowing $200.
How is the payday loan fee calculated?
Usually lenders charge a fixed fee for per amount borrowed. For example $10.00
for every $100.00 you borrow and it can be as high as $30 for every $100.00
you borrow. Ouch and double ouch! This translates to something like 700% annual
rate of interest and some people are worried about the 20% credit card interest
rate.
How can Truth in Lending Act help you?
Under the Truth in Lending Act, the lenders must disclose the cost of payday
loans. So look for them to compare. 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).
What type of collateral should you have?
Your personal check is the collateral. Reverting back to the old days of my
word is my bond. But since many people break their words as easily as they
would their bonds, lenders make these loans very very expensive so that those
who do pay will carry the cost of collection from those who do not pay.
What alternatives do you have instead of payday loans?
Contact your credit union or small loan company, find out if your company
offer any short term assistance. I know it could be hard to tell friends and
family members about your financial hardship but swallow your pride a little
bit and ask them for help. Just make sure that you don’t swallow your pride
too much by not paying them on time.
If you are borrowing to pay other debts or other bills, why not just ask your
creditors for more time to pay your bills? Find out what they will charge
for that service including late charges and additional finance charge or a
higher interest rate.
What steps can you take to reduce the cost?
When you need credit, shop carefully. Compare offers. Look for the credit
offer with the lowest APR.
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.
Some firms will offer you a low cost guarantee that helps you save time in
comparison shopping. An example of this type of guarantee is: “Must be a verifiable,
bona fide offer from an online payday loan provider. Excludes one-time, promotional
offers. Rate comparison must be based on a 14 day loan of less than $500.”
How to cure the problem not the symptom?
Pick up meditation and prayer and I don’t mean bombarding God or whatever
higher power you believe in with requests for money. I mean take the time
to get to know your higher Self that can help you look at life in a more balanced
fashion. This knowledge can help you control emotional stuff which are major
reasons for out-of-balance expenditures and emotional spending binges. Who
knows, you may even be able to have a direct communication with God and straighten
out more than your finances.
Remember that the outer world is just a reflection of us inside and we cannot
change our outer circumstances without changing what we think in our hearts.
The need for money usually stems from a combination of low income and lack
of disciplined spending habits. Take steps to improve your income which usually
starts with better education. Look for ways to improve your education and
acquire new skills that can help you get better jobs and higher paying positions.
I know it is hard to get enough energy at the end of 50 – 60 hour week to
study. But, don’t you rather have the stress of studying for a better future
for a limited time than to keep worrying about payday loans for years to come?
Also, with the Internet, you may have small business opportunities that did
not exist before.
Take a good look at where your money went during the last six months. If an
item shows up over and over, it is no longer a one-time deal. Make a budget
that really reflects your monthly and daily expenditures.
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-cost or low-cost credit counseling
programs.
Finally, 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.
What are the benefits?
So what are the benefits to this payday loan? It sounds like there isn’t any.
With so many companies cropping out every day offering this service and thousands
of individuals using them and even offering testimonials to their benefits,
I have to concede that there are benefits.
To start with, many times Payday Loans are really the only fast alternative
to get you out of a financial jam. The qualification is hassle free. You can
get a yes or no answer fairly fast and it can be done online.
In many cases there aren’t any credit checks.
Some lenders do not even require you to fax them documentation.
Your inquiry is kept confidential.
And you can have the cash by the next business day.
* DISCLAIMER: Vishy Dadsetan, http://www.MyPersonalFinance.com or My Favorite
Shop, Inc. do not endorse any reverse mortgage product or lender. This article
and website does not provide legal, accounting, or other professional services.
If legal or other expert assistance is required, the services of a competent
professional should be sought. Although Vishy Dadsetan has made every effort
to ensure the accuracy and completeness of the information contained in this
site, it assumes no responsibility for errors, omissions, inaccuracies, or
inconsistencies.
Vishy Dadsetan writes articles that can actually help your clients. Articles
just like this one. Additional information at: online
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