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Ten Questions about Payday Loans

Are you broke and considering getting a payday loan? Here are some things to consider before heading to a check cashing store.

What exactly is a payday loan?

Also known as a cash advance or quick cash, these short-term loans are generally approved right away without credit checks and allow people to borrow against future paychecks for a fee. People who use these loans are usually having a tough keeping up with all of their expenses. In many cases they have bad credit and can't get other types of loans.

You mean I can get cash right away?

In most cases you will. You'll be required to write a post-dated check for the amount you want to borrow plus a fee for the service. If you apply via telephone or over the Internet, you'll have the money deposited into your bank account within 24 hours.

How much will it cost me?

Most payday loans charge a fee that is a percentage of the amount borrowed or a flat fee based upon the amount. For example, you may pay $15 for every $100 borrowed. Many consumer advocates complain about the high interest rates borrowers pay for cash advances. For instance, if you borrowed $100 and paid a $15 fee for a 14-day period, you'd end up with a 391% annual percentage rate (APR) on that loan. Each time you chose to roll over, or extend that loan another two weeks, you'd add on more fees. Because of these high interest rates, businesses that make quick cash loans are often referred to as predatory lenders.

If the rates are so high why aren't these loans illegal?

So far only 12 states have banned payday loans in an effort to protect consumers. And although consumer advocates and legislators have complained that check cashing stores frequently target low income and minority neighborhoods, not much has been done to keep them from flourishing. Because of complaints about predatory lenders targeting military personnel, Congress capped the interest they could be charged at 36%.

I heard some credit unions are offering payday loans. How are they different from other quick cash lenders?

In an effort to help people who've gotten into a cycle of debt by using cash advances, some nonprofit credit unions are offering loans at lower interest rates. Generally the goal is to combine multiple cash advances that have piled up into one loan at a lower interest rate. While these products can help people pay down their debts, there are some critics since many of these programs still require the loan to be paid at the end of the term or rolled over into another loan.

If cash advances are so expensive why do people continue to use them?

There are several reasons. But two of the main reasons are that they're convenient and require no credit checks. You also don't even have to leave your home to apply for one and can have the cash within 24 hours. Another incentive is that your financial information won't be shared with anyone. Only you can decide if a payday loan is right for your situation. However, if you do choose the quick cash route, make sure you understand all of the fees involved to avoid getting in over your head.

Sources
New York Times
"Nonprofit Payday Loans? Yes, to Mixed Reviews," by John Leland, www.nytimes.com.
Federal Trade Commission
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