We Know: Are Payday Loans a Good Idea?

What are payday loans?

Payday loans are short-term loans (usually two weeks) for immediate cash. They are typically secured by a borrower's written check or authorization for automatic withdrawal from the borrower's bank account. The check the borrower writes is good for the amount borrowed plus a fee (finance charge / interest).

What is the typical interest rate of a payday loan?

Typical APRs for payday loans range from 391% to 443% with finance charges of $15 to $17 per $100. Usually, however, the loan rolls over and the interest rate is much higher. If the borrower cannot repay the loan at the following payday, they must pay the finance charge again. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100 for just six weeks.

Who uses payday loan services?

Typically, the working poor use payday loan services. The typical customer lives paycheck to paycheck and has no access to funds should an emergency arise. According to the Center for Responsible Lending (CRL), 91% of payday loan borrowers receive five or more loans per year with 27% of borrowers getting 13 or more payday loans per year.

What happens if the borrower defaults on the payday loan?

If the borrower defaults on the payday loan by failing to make good on the written check or not renewing the loan and paying the necessary fees, then the check bounces. This results in mounting NSF fees, harassment of collection agencies, and possible prosecution.

Are payday loans legal?

The Industrial Loan Act of 1955 essentially made payday lending illegal by requiring state licensing and registration and by imposing strict usury limits on small loans. However, payday lenders use the loophole of charging a "service fee" instead of interest.

What are some alternatives to payday loans?

Instead of a payday loan, you might want to consider:

  • using your checking account for overdraft protection
  • keeping a credit card for emergencies only and paying it back as if it were a loan
  • contacting food banks and charities that will pay your utilities so you can use the cash for your emergency
  • find a way to wait until your next payday to handle your financial problem

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