Short on cash? Step right up and take out a payday loan. This increasingly popular line of credit will provide you the $100 or $200 you need to get by until your next paycheck. The price? Only average interest rates of 470% APR (annual percentage rate).
Also known as cash-advance loans, postdated check loans, or delayed deposit check loans, payday loans are a star product at check-cashing outlets. Touted as a convenient financial Band-Aid, they exact exorbitant fees from consumers.
Typically, a customer writes a postdated personal check to a check casher for the amount he or she wishes to borrow--plus the fee. The customer and check casher both understand there are insufficient funds, at that time, to clear the check. The check casher holds the check until the customer's next payday, say two weeks down the road, at which time the consumer can:
* redeem the check with cash or a money order;
* allow the check to be deposited; or
* renew, or roll over, the loan by paying an additional fee.
Companies frequently assess fees of $10 to $35 per $100 borrowed. So, if the fee is $20 per $100, a customer needing $100 would write a postdated check for $120, dated 14 days down the road.
Stated as an APR, the fees are shocking. According to a 2001 Consumer Federation of America (CFA) and Public Interest Research Group (PIRG) report on the payday loan industry, the APR on $100 borrowed for 14 days ranged from 182% to 970%. The fees climb even higher if a consumer renews, or rolls over, the payday loan. Before long, escalating charges dwarf the original balance.
Your first stop for loans always should be your credit union. How does a credit union loan compare with a payday loan? Say a member pays $120 to borrow $100 for one month from a payday loan company. If he were to take out a $100 unsecured personal loan at 15% APR from his credit union, he would pay only $1.25 in interest if he pays back the loan within a month. "You'd end up paying 16 times more for the payday loan than the credit union loan," says Mike Schenk, vice president of economics and statistics at the Credit Union National Association in Madison, Wis. "That's before you take into account any other fees you might be charged."
Copyright 2002 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.
