Small, short-term, high-rate loans are marketed under a variety of names: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans. To obtain the payday loan from a storefront lender, a consumer writes a check payable to the lender for the amount he or she wishes to borrow plus a fee. The lender gives the borrower the amount of the check, minus the fee. The lender then holds the borrower's check until his or her next payday, when the borrower can do one of three things: allow the check to be cashed, redeem it by paying cash to recover the loan plus a fee or roll it over by paying the fee to extend the loans for two or more weeks.
Under the Truth in Lending Act, the cost of the payday loans - like other types of credit - must be disclosed. Among other information a consumer must receive from the company, in writing, is the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis). Finance charges can range from $15 to $30 per $100 borrowed. This may not seem like a lot of money until you look at the APR for the loan. A credit industry survey found the average annual percentage rate for a payday loan to be 300 percent! With interest rates like this, payday loans can lead to a downward spiral of debt which customers find difficult to escape.
BBB and Federal Trade Commission recommend that before you decide to take out a payday loan, consider some alternatives:
-Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments. Many may be willing to work with consumers who they believe are acting in good faith.
-Consider a small loan from your credit union or a bank.
-Shop for the credit offer with the lowest cost. Compare the annual percentage rates (APR) and the finance charge which includes loan fees, interest and other credit costs.
-Contact your local credit counseling service if you need help working out a debt repayment plan.
-Customers are also encouraged to contact the Minnesota Department of Commerce or North Dakota Department of Financial Institutions before engaging a payday lender, to verify proper licensure.