Payday Loans – How Do They Work? Is This Your Only Option?

Online payday loan is known under various names: Payday loans, Cash advance loans, Check advance loans, Post-dated check loans, Deferred deposit loans

Loans can be acquired through institutions such as:

  • Direct payday loan company
  • Finance company

How do they work?

  1. The borrower (that’s you) issues a check to the lending institution (for our purposes we will use the “Check Casher”).
  2. The Check Casher will agree to hold the borrower’s check until the loan is due, typically until the borrower’s next payday.
  3. The Check Casher then issues a check or electronically deposits the funds into the borrower’s checking account.
  4. The amount that is given to the borrower is the amount of the original check from the borrower less a fee. The fee is based on a percentage of the money borrowed or the fee is based on increments of the amount borrowed. For example, the borrower could be changed a $50 fee for every $100 dollars that is borrowed.
    NOTE: If the loan is extended or “rolled over”, the borrower will be charged new fees.

What the direct cash lenders must tell you.

As dictated by the federal Truth in Lending Act, the Check Casher must disclose, in writing before you sign, the following information:

  • Finance charge – which will be in a dollar amount
  • Annual percentage rate – which is the cost of the loan on a yearly basis, based on:
    The amount borrowed
    The interest rate and credit costs charged on the loan
    The length of the loan

Is this really how you want to get cash? You decide.

If you take out a loan for $100 for two weeks (until your next payday) and the fee for the loan is $15, on the day you are paid, the Check Casher is either going to deposit your original check or, if agreed upon, they are going to electronically withdraw the loan amount from your checking account. If for some reason you cannot pay back the loan on the date agreed upon, the loan can be “rolled over” for another two weeks until yet another payday. However, you will be charged another $15 fee for the loan. This $100 loan has now cost you $30. Even if you do not have to “roll over” the loan, the initial $100 loan with the $15 fee would have an annual percentage rate or 391 percent. Are you saying “WAIT A MINUTE!” If so, there are alternatives.

What are the alternatives?

  • Look into a small loan from your credit union, bank or other financial institution which offers small loans.
    a) Do they offer short-term loans?
    b) What about a cash advance on your credit card? Be careful here, look at the APR (annual percentage rate)
  • What about all of those credit card offers that are continually coming in your mail box?
  • Compare the APR and finance changes – can you get the money cheaper this way?
  • Why do you need the quick cash check advance? Are your creditors calling you? Contact them now! Many creditors are willing to work with you. They just want to know that you are making a “good faith” effort. Meaning you are trying, but right now, things are a little tight. Find out how the creditors are willing to work with you and if there are any additional fees involved.
  • Are your finances just a mess?
  • Contact your local consumer credit counseling service, they can help you with: Debt repayment plan with your creditors or planning a budget (I like to look at this as a “Spending Plan.” Most people think of “budget” as a bad word, they are now restricted. But the “Spending Plan” lets me know exactly where my money is going and how much I do have to spend.)
  • Do you already have a budget? Is it realistic?
  • Does your budget include your monthly and daily expenses?
  • Be careful of those “little” expenses, they add up.
  • Do you stop every morning and get coffee on our way to work? How much would you save a month if you made the coffee at home and brought it to work? Seems silly? Add it up, I think you’ll be surprised.
  • Does your budget including savings? No matter how little, if you put something away every payday then when you need an extra $100 you have it, and it does not cost you anything (except a little discipline).
  • Are their pennies left in your checkbook after you finish paying your bills and you sometimes make addition or subtraction errors? Is this causing you to need a few extra dollars?
  • Check with your bank, do they offer overdraft protection or “bounce protection”?

One comment

  1. You can often get approved for payday loans in one hour, which is much faster than many bank loans or short term loans.

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