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Educational Consumer Tips

Payday Loans

Author: Better Business Bureau
Category: Finance

This report is general in nature and is not intended as a reliability report on any company, service or product.

There are potential pitfalls for consumers who patronize payday lenders. The potential for ID theft and unauthorized bank withdrawals is great in operations such as these. Consumers are urged to be cautious when giving personal information to an unfamiliar firm.

Online lenders may be hard to locate or impossible to contact. Some hide behind anonymous domain registrations or may be located outside the <st1:country-region>U.S.</st1:country-region> The borrower can face difficulties communicating with Web lenders regarding any questions they may have or to resolve disputes that may arise. Internet payday lenders can bypass state usury laws and consumer protections by locating in states with lax regulations. They can make loans without complying with the licensing requirements or other protections of the borrower's home state.

Small, short-term, high-rate loans are marketed under a variety of names: payday loans, cash advance loans, or check advance loan. 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.

If the borrower chooses an Internet payday lender, the loan is applied for online and the funds are delivered and collected through electronic fund transfers between the lender and the borrower's bank account. The loan is based on electronic access to the borrower's bank account. If a loan broker is used, your application can be submitted to various online lenders. Sometimes, money can be deposited in the consumer’s bank account, sometimes without the consumer’s knowledge, complainants have told the BBB. When the consumer refuses to pay, the account is turned over to a collection agency.

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, in writing, 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 APR for a payday loan to be 300 percent.

The Better Business Bureau, along with the Federal Trade Commission, advise consumers to consider other possibilities before deciding on a payday loan:

  • If you need credit, shop carefully. Consider a small loan from your credit union or a small loan company, an advance on pay from your employer or a loan from a family member or friend.
  • 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.
  • 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 that offer credit guidance to consumers for little or no cost.

For more advice you can trust from your local BBB on avoiding scams and fraud, go to