The ads are on the radio, television, the Internet, even in the mail. They
refer to payday loans - which come at a very high price.
Check cashers, finance companies and others are making small, short-term,
high-rate loans that go by a variety of names: payday loans, cash advance
loans, check advance loans, post-dated check loans or deferred deposit check
loans.
Usually, a borrower writes a personal check payable to the lender for the
amount he or she wishes to borrow plus a fee. The company gives the borrower
the amount of the check minus the fee. Fees charged for payday loans are
usually a percentage of the face value of the check or a fee charged per amount
borrowed - say, for every $50 or $100 loaned. And, if you extend or
"roll-over" the loan - say for another two weeks - you will pay the
fees for each extension.
Under the Truth in Lending Act, the cost of payday loans - like other types
of credit - must be disclosed. Among other information, you must receive, in
writing, the finance charge (a dollar amount) and the annual percentage rate or
APR (the cost of credit on a yearly basis).
A cash advance loan secured by a personal check - such as a payday loan -
is very expensive credit. Let's say you write a personal check for $115 to
borrow $100 for up to 14 days. The check casher or payday lender agrees to hold
the check until your next payday. At that time, depending on the particular
plan, the lender deposits the check, you redeem the check by paying the $115 in
cash, or you roll-over the check by paying a fee to extend the loan for another
two weeks.
In this example, the cost of the initial loan is a $15 finance charge and
391 percent APR. If you roll-over the loan three times, the finance charge
would climb to $60 to borrow $100.
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