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Need Quick Cash? Don't Forget The Perils Of Payday Loans |
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Payday loans are called many different things--cash advances, check advance loans, post-dated check loans--but they all work basically the same way. A soldier needs $100 to pay bills but can't wait until the next payday. He takes a copy of his LES (Local Employment Service) to a payday loan shop and writes a check for $130. The loan shop gives him $100 and out the door he goes. The lender holds the check until the next payday, usually two weeks. After the 14 days, the soldier must return and pay $130 in cash to get the check back. The soldier paid $30 for a $100 loan for two weeks. Payday loans are dangerous for two reasons. First, they usually involve extremely high interest rates. In the example above, the $30 fee charged on the loan of $100 comes out to an annual percentage rate (APR) of 780%!! To put this into perspective, the APR on most credit cards is 12% to 20%; most car loans are below 15%. The second danger with payday loans is that they can lead to an endless cycle of debt. Let's say the soldier can't pay back the $130 at the end of two weeks. No problem, says the company, give us $30 and we'll give you two more weeks to pay. Sounds like they are cutting the soldier a break, doesn't it? Actually, they're luring him into the cycle. What they aren't so quick to point out is that after the second two weeks, the soldier will owe another $30 service fee. After one month, it will have cost him $60 for the $100 loan. Before long the soldier has paid more in fees than the amount of the original loan. Are They Legal? In many states, including Texas, payday loans are legal. Texas law sets a limit on how much interest can be charged on payday loans. If the company is licensed with the state, it can charge up to about 150% APR. Unlicensed companies can only charge 100% APR. Companies can avoid these limits if they are part of a national bank based in another state. No matter what they are called, federal law requires payday loan companies to tell the consumer about the costs of the loan. These costs must be stated both as a dollar finance charge ($30 per $100 borrowed) and as an annual percentage rate (780% APR). This allows you to compare the interest rates on payday loans to other options, such as credit card cash advances. Also, companies must display their licenses allowing them to provide payday loans in Texas. However, when it comes to payday loans everything in life is not rosy and delightful. Indeed, there are some serious drawbacks to using the services of a cash advance, payday loan service. First thing is the incredibly high interest rates that are associated with typical payday loans. Many people who take out payday loans do not pay close enough attention to the interest rate associated with loan itself. In little time, these people find themselves buried under a prohibitive pile of debt associated with the initial payday loans. And in many other instances, if a person gets a cash advance, payday loan on one occasion, her or she likely will be back for another, and then another, and so forth. People can get deep in debt when they take out a loan against their paycheck. They write a postdated check in exchange for money. When they get paid again, they repay the loan, thus the name payday loan. Payday loans generally come with very high, double-digit interest rates. Borrowers who can't repay the money are charged additional fees for an extension, which puts them even deeper in debt. Borrowers can continue to pay fees to extend the loan's due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees. |
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