Avoid Payday Loan Scams
As the Thanksgiving and Christmas Season looms just over the horizon, having available money for holiday shopping swings into the forefront of our thoughts. As enticing as it may be, you should avoid payday loans except as an absolute last resort. Payday loans are also called “cash advance loans” and they are small, short-term loans that carry very high interest rates. Some companies have even begun to advertise them as “loans to help you repair your credit”, but this is very misleading. Some companies suggest that these loans can help you pay off your bills and so establish good credit, but if you cannot afford to pay your payday loans back on time, you have to “roll-over” or extend the loan – often at huge expense and interest. Many people get into a “payday loan cycle”, whereby much of their monthly paycheck goes towards paying off their ever-growing payday loans.
The typical process for a payday loan involves you writing a check, made out to the lender for the amount you’re borrowing, plus fees. You’re given the net amount. The fees may be based on a percentage of the loan amount, or charged in increments, for example a set amount for each $50 or $100 loaned. Borrowers can often choose to extend or “roll-over” the loan period, with fees charged for each extended loan term. Let’s say you borrow $100, with payment due in two weeks. The lender takes your personal check for $115, and holds it until your next payday, or, rolls it over into the next loan period. You receive $100, the lender keeps $15, which equals an APR of almost 400%. If you extend the loan term with three more two-week periods, you’ll pay $160 for that $100 loan.
The Truth in Lending Act requires a specific set of guidelines to be given to the borrowers before the loan agreement is signed. Several states are investigating payday loans for possible illegal activity stemming from usury laws.
If you cannot afford your bills one month, you are much better off trying to arrange an alternate schedule of payment with the companies you owe money to rather than risking your credit rating through payday loans. Payday loans may be fine in a true emergency, but the “payday loan cycle” gets very unaffordable very fast and can ruin
your credit rating for a very long time.