Category Archive for: "FTC"
The FTC recently weighed in on Payday Loans and I couldn’t agree more with their take on things. Payday loans are NOT loans that should be taken out for frivolous expenses like eating out or getting a new TV just because the sale ends before your paycheck arrives! Use common sense here people and ONLY get a payday loan in case you REALLY have no other choice.
To understand why you shouldn’t get a payday loan for these types of discretionary expenses (wants versus needs), you first need to understand what a payday loan is and how a payday loan works.
What is a Payday Loan?
A small (usually under $1000), short-term (should be paid back at next paycheck: 2-4 weeks), high-rate loans (ranging from 7% if you have the most amazing credit score ever and don’t mind waiting a week or two to receive the money) to 450% if you have terrible credit and need the money in an hour) by check cashers, finance companies and private lenders.
How Do Payday Loans Work?
When you get a payday loan online, you agree to let the lender withdraw the loan amount on your next payday. The payday lender will usually deposit the loan you requested (minus their fees) within 1 to 24 hours. The fees on pay day loans can be a percentage of the amount you borrowed or they can be based on increments of money borrowed (i.e. you pay a set fee for every $100 you borrow). If you ever need to extend (aka “roll over”) your loan past the usual 2-4 weeks (one payday period), you will be charged new fees each and every time. These fees can really add up, so do your best to pay it off in the one pay period you originally agreed to.
Real Life Example of How A Payday Loan Works
Lets say you need to borrow $200 to pay for an unexpected car expense. You signup online with a reputable pay day lender for a $300 loan. The fee per $100 borrowed is $15. So, instead of getting $300 deposited into your bank account in 1 hour, you only get $255 ($300 loan – $45 in loan fees = $255 deposited into your bank account0. When the loan comes due in 2 weeks, the payday lender will auto-withdraw the amount you borrowed ($300) from your bank account. If you need to extended the loan because you don’t have the $300 needed in your account, the lender will do it, but you’ll need to pay another $45 loan fee! That’s how the APR (Annual Percentage Rate) can climb all the way up to 450%+
The Federal Truth In Lending Act Is Here To Help
Just like when you’re getting a car loan or a mortgage, every payday lender MUST disclose the cost of the loan to you. They must give you the finance charge (a $ amount) and the APR (the cost of the loan on a yearly basis) in writing before you agree to the loan. The APR is based on several different things, including the amount of money you borrow, the interest rate on the loan and credit costs you will be charged, and the expected length of your loan.
Here’s one such disclosure chart from the popular payday loan / personal loan provider Great Plains Lending:
Cheaper Ways To Get a Short Term Loan
If you don’t need the money in one hour or even a couple of day and you’ve got good a good credit score, then you should really consider getting a loan from a personal loan provider instead of a payday loan provider. Personal loans take longer to receive (up to a week or two) but are much, much cheaper than payday loans.
If you’re not under a serious time crunch and you’ve got excellent credit, then you should really get a short-term loan from someone on Prosper.com where rates start as low as 6.59%. Learn more at www.prosper.com