Does "I just need enough cash to tide me over until payday." sound familiar
to you? I'm betting it does. We constantly find ads to this effect on the
radio, television, the Internet, and even in the mail. The type of loan being
referred to, of course, is payday loans. And they come at a very high price,
too, by the way.
Payday loans have become a way for people to get fast cash. Check
cashers, finance companies and others are making small, short-term, high-rate
payday loans that go by a variety of names. Sometimes, they're called cash
advance loans, check advance loans, post-dated check loans or deferred deposit
But how do payday loans work? Well, usually, a borrower writes a
personal check payable to the lender for the amount he or she wishes to borrow
plus a fee. Afterwards, the company or the lending institution would then give
the borrower the amount of money in the check minus the fee. The fees charged
for payday loans are usually a percentage of the face value of the check.
Sometimes, the fee may be charged per amount borrowed. For instance, for every
$100 loan you borrow, you get charged a fee of $50. If the loan is extended, a
process referred to as "roll-over", you are obliged to pay the additional fees
that could incur. So for example, you make an extension of two weeks for your
$100 loan. That means, you pay a total of $150 in fees, provided that one week
equals to a $50 fee.
Under the Truth in Lending Act, the cost of payday loans, like other
types of credit, must be disclosed to the borrower. Other pieces of relevant
information that you must receive in writing include the finance charge or the
dollar amount and the annual percentage rate or APR. The APR refers to the cost
of credit on a yearly basis.
Fast Cash, High Rates
A payday loan, which is a cash advance loan secured by a personal check,
is a very expensive source of credit. But despite this, many people still opt
for payday loans. To explain to you just how expensive payday loans can be,
let's say that you need to borrow $100 and so you write a check for $115 which
would pay your loan for up to 14 days. The check casher or payday lender agrees
to hold the check until your next payday. At that time, depending on the
particular plan, the lender deposits the check. You then redeem the check by
paying the $115 in cash. If you can't make the payment, you can also roll-over
the check by paying a fee to extend the loan for another two weeks. In this
example, the lender charges you $15 as fee and at the same time, the loan costs
you 391 percent APR. If you roll-over the loan three times, the finance charge
would climb to $60 to borrow $100.
Tony Forster has a keen interest in living debt free having been "up to his ears" before realizing the need to take control. He has compiled an online financial article resource at