By: Lance T. Denha, Esq.
Payday loans are small loans you can use when you are temporarily out of money. Most often, payday loans are short term loans (two weeks or so) for a modest amount of money (a few hundred bucks). During these turbulent economic times millions of working Americans are facing, payday loans are becoming a popular source of short-term financing. This has been especially true for low-income families. Payday loans are easy to get and don’t require any sort of credit check, but are they really a good idea?
Here’s how they work: A borrower writes a post-dated personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. It’s the equivalent of getting your next paycheck early. 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 is due to 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.” You don’t have to repay it, but fees keep accumulating. The annual percentage rates run rates from 391% to 782% for a two week extension of credit.
The down side to this is most of these people are already experiencing financial hardship and borrowing money with such a high interest rate just makes matters worse. In addition, many of these people find themselves unable to repay the loan when it comes due. This situation leads to additional bank charges for bounced checks and the cost of the loan, or they have to extend the loan causing even more fees. Many of these people trap themselves in a vicious cycle. They pay the loan off on the next payday, but discover they do not have the funds needed to cover their expenses. They then find themselves going back for another payday loan. This cycle can continue indefinitely since there is no limit on how many times a person can get this type of loan. The lender may also sue you or send your account to collections, which will affect credit scores.
Signs to determine if lenders are operating illegally regarding payday loans include whether online lenders are ignoring state laws limiting the rates of payday loans. Payday lenders often evade the laws by taking advantage of loopholes in the laws and also by changing the amount or form of the payment so as to confuse those attempting to place a stop payment order on the loan. The right to stop payment is an important one that gives the borrower control if a creditor is attempting to collect an illegal or disputed amount.
If you’re already in trouble with a payday loan company, you should think about getting professional help with your budgeting and debt situation. Often the practice of predatory or abusive lending makes the interest of a loan appear lower while making it appear that the borrower’s ability to repay the loan is greater than it actually is. The outcome can be financially damaging to the borrower. It would also be wise to consult with an attorney or the Federal Trade Commission to determine if the type of pay day loan received can be considered a crime or if there are civil penalties associated with the type of pay day loan received which may be predatory in nature as pay day loans are typically associated with abusive lending.