Could pay day loans be the answer consumers with low bank accounts have
been looking for? Is there any harm in using these services? Aren't
they better than using credit cards or going hungry?
You've seen the commercials. Cute characters promise financial
prosperity. Happy, professional individuals appear to regularly visit
their corner pay day loan shop as proudly as cashing a check at the
bank. Customers at the grocery store all recommend pay day loans as the
easy solution for a lack of funds.
WHY USE A PAY DAY LOAN?
Some individuals reason that paying a bill with borrowed money is
better than receiving bad credit marks because of not paying the bill.
This is understandable. However, some financial institutions are
willing to make the occasional exception if contacted about the
situation. Or there may be a small fee, but not a credit report made.
Using it for groceries or other items? Consider the true cost before
making a decision. Compare the cost of using a pay day (or cash
advance) loan to the fees charged for taking a cash advance on your own
credit card. Can family help? Often those who are forced to use pay day
loans are not able to repay the loan by the next pay check and that can
lead to a cycle of debt and stress.
WHAT IS THE COST?
Several sources, including a consumer report by the FTC (Federal Trade
Commission) and the CFA (Consumer Federation of America) state that the
usual APR is between 350 - 650% with some as high as 780%!
A loan of $100 ranges in cost between $15 - $30. If the loan is not
repaid by the pay date then it can be renewed with another fee due at
each renewal. A loan of $100 can cost $60 in fees after 3 renewals.
WHO BENEFITS?
Based on the warnings issued by federal and consumer organizations it
is clear that using pay day loans or cash advances from these
businesses can often lead to more debt and problems. Some sites were
reported to automatically roll over the loan and only withdraw the
renewal fee on the pay date. Other sites surveyed by the CFA required
customers to agree in contract to not participate in class action suits
or to file for bankruptcy.
For those who are having debt problems it is recommended to seek no- or
low-cost credit counseling from a local non-profit organization. These
organizations can help with reducing current interest charges and
lowering monthly payments. If the problem is budget, you should look to
a financial planner who can help you to manage the money you do have
and avoid using credit at all.
