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Payday Loans

Devona Walker, Staff Writer Published: April 27, 2008
How it works?

Payday loans, cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans are short-term, high-rate loans. The borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically. The loan amount will be debited the next payday. The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”

Alternatives to payday loans

Before you decide to take out a payday loan, the Federal Trade Commission suggests you consider these alternatives:
Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds; find out the terms before you decide. In any case, shop first and compare all available offers.

Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs. Contact your creditors or loan service as quickly as possible if you are having trouble with your payments, and ask for more time. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.

Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for free or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.

Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.

Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you — both what it costs and what it covers. Some banks offer “bounce protection,” which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.
The payday loan industry is a risky and costly option, and payday loans are costing consumers billions of dollars each year in unnecessary fees, according to consumer advocates and the Federal Trade Commission.

The nation’s consumer protection agency has barred the industry from doing business with enlisted military personnel and their family unless the loans are capped at 36 percent.

Sharon Reuss, spokeswoman for the Center for Responsible Lending, called the payday loan industry the free market’s most blatant example of predatory lending practices, and said it is directly responsible for roughly $42 billion annually in unnecessary fees.

"I think that making credit available to Americans at affordable, sustainable rates is important all the time," Reuss said. “And I think it’s been recognized that payday lending is abusive. It does trap people in a debt cycle that is very difficult for people to get out of.”

Roughly 60 percent of payday loans go to borrowers with 12 or more loans per year.

About 24 percent of loans go to borrowers with 21 or more loans per year. One in seven borrowers in Colorado has been in debt every day of the past six months. And nearly 90 percent of repeat payday loan borrowers are made shortly after a previous loan had been paid off, research from the Center for Responsible Lending found.

In Florida, nearly 45 percent of repeat payday loans are taken out as soon as a mandatory 24-hour cooling off period expires. In Oklahoma, data shows 87 percent of the loans are taken out during the same pay period the previous loan was paid off. In short, there appears to be a slight pause in this type of lending, but the borrowers tend to flip the debt and continue to remain in long-term debt.

Five payday loan centers are on W Britton Road, between Western and Pennsylvania avenues. Each represents a different chain operating in the city. On a recent afternoon, a 47-year-old man walked out of CashPlus with roughly $500 that he said he borrowed for a medical emergency.

Don, who did not want to reveal his last name, said while it is true the interest and fees on the loans are incredibly high, sometimes payday loan centers are helpful.

“I can certainly see how someone can get caught up in that, but it is very helpful in a crisis,” Don said. “If you need to get some cash quickly, which I did.”

Don said he thinks legislators should provide more regulation for the industry, something lawmakers around the nation are considering.

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