A payday loan is a short-term loan for $100 to $500. It is sometimes
called a cash advance because you make the loan with the promise to repay
from your next paycheck.
How it Works
For example, on February 1 you needed $200 cash but your payday is in
two weeks. The lender agrees to give you the loan with a $60 service fee.
You then write a postdated check for February 14 for $260. The lender
will then give you $200. The lender will hold your post-dated check.
How You Repay
To repay your loan you will redeem your post-dated check with cash, money
order, or let the loan company deposit the check to your bank.
Another option is to rollover the loan. This means that the loan can
be repaid at still a later date. An additional fee is added onto the first
loan making your loan total $320 ($260 + $60).
The loan can be rolled over two, three, or more times, before coming
due. Each time the loan is rolled over, you will be charged an additional
fee. As a result, this type of loan can be very high priced credit.
The Real Cost
The real cost of the payday loan is the charge the company makes for
lending you the money. This real cost depends on the amount of the loan,
the lenders fee scale, and if you have gotten a loan before with the lender.
The lender usually does not quote interest rates, but quotes fees in
dollar amounts. If the fee cost is quoted like with other traditional
loans, the interest rates are very high. Based on annual percentage rates
you may be paying as much as 2000 percent for using this type of loan.
Rates for a $100 loan
||X Change Payday
|Fee for a 14 day loan:
If You Do Not Repay
If you do not follow the repayment agreement, the loan company can cash
the check from you. If the check bounces, this will cause extra charges
from your bank and charges from the lender.
Writing bad checks is illegal and you can be threatened with criminal
Should You Use Payday Loans?
Payday loans may sound like a good source of quick and easy cash. But
the truth is these types of loans may push you further into debt. Ask
yourself these questions:
- What are the total fees, the payback plan, and the penalties if you
don't pay on time?
- Did you comparison-shop for the best rate?
- Why do you need money for emergencies? Do you need an increase of
income, revise some of your expenses?
- How can you get a loan that is less costly? Can you borrow from friends
- Do you need to talk with a financial counselor to solve your money
- How can you save $300 in a savings account that would be for emergencies?
- Can you delay paying a non-interestcharging bill such as utility bill
and make payment arrangements with them instead?
If you decide to borrow money from a payday loan lender, make certain
to borrow only what you can afford to pay back from your next paycheck.
Written by Rhonda Hardy, Extension Educator,
Consumer and Family Economics, University of Illionois Extension, Chicago
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