Payday loans are simply alternative methods to get extra cash with very little requirements. In reality, these loans should only be used as a last resort in case an unexpected emergency arises and you have no other options. However, even when experiencing an emergency and in need of extra money fast, you need to be very wary of this easy form of financing. Before ever considering a payday loan, you should first understand what a payday loan is.
A payday loan is a high interest loan, borrowed against your paycheck. Now-a-days, payday loans can easily be acquired online or over the phone. In order to get a payday loan, all you need is your proof of income, and a checking account where the money can be automatically deposited into and/or withdrawn from.
Payday loans are short term loans, therefore they come with very high interest rates. A lot of payday lenders might try and take advantage of people who have little knowledge about interest rates and loans. Despite numerous warnings from the federal government concerning these loans and predatory lenders, the Consumer Federation of America reports that payday agreements are still permitted in over 30 states.
According to the state of Georgia Consumer Protection website, there are over 10,000 payday loan stores across the country. Georgia is one of the few states that prohibits the practice of payday lending. The state of New York is also one of few the states where payday loans are illegal. If you receive an offer directly, it’s advised to report it to the New York State Banking Department by calling 1-877-BANK-NYS (2265-697) or visiting www.banking.state.ny.us.
According to the FTC, legitimate lenders ALWAYS conduct credit checks for loans. However, mostly all payday lenders get away with avoiding credit checks altogether because many borrowers in need of a payday loan do not have good credit to begin with. Payday lenders promote the idea that people can get loans without running a credit check first and this can help people get the cash when they truly need it. But remember that if you borrow only one hundred dollars from a payday lender, the interest you will be paying may double that amount. If the borrower fails to pay the interest back along with the amount borrowed, interest payments will continue to rise and pile up.
If you do happen to have really good credit and are in need of cash fast, try looking into personal loans with your regular bank or credit union. These types of loans have much lower interest rates and more flexible payment terms then payday loans.
For those who can’t help but get a payday loan, it is highly recommended to limit your usage to 25-30% of your paycheck at most. Many people might use up to 50% of their paycheck to borrow from payday lenders. Borrowing anymore then 25% could be dangerous when paying the loan back especially if you have other accounts such as credit cards, mortgages, or car loans you pay each month.
The federal Truth in Lending Act requires disclosure of the cost of credit. You must receive, in writing, the finance charge (a dollar amount) and the APR, which is the cost of credit on a yearly basis. Payday lenders are subject to this regulation. Visit this FTC website for additional information and tips on payday loans.
Three tips to consider before getting a payday loan:
– Ask yourself if your problem is big enough to even approach a payday lender.
– Think about how much you need, what the interest could add up to, and consider the loan only if you know you can repay it all.
– Stick with one payday loan under one payday lender instead of going with multiple payday lenders. This does not mean don’t shop around. Look for one payday loan that you can afford and stick with it.
Some practical alternatives to payday loans are:
-Learn more about Human Resources Administration (HRA) emergency assistance programs, including cash assistance, medical assistance, food stamps and job opportunities. Call 311 or visit www.nyc.gov/hra to learn more.
-Look into a small loan from a credit union or bank. These loans usually have lower interest rates than a payday loan. Be sure to shop around to find the best offer for you.
-Inquire about an advance from your employer.
-Ask family or friends for a small loan.
-A cash advance is sometimes available from your credit card provider. It may have a higher interest rate than a credit union or bank loan, but it’s a lot cheaper than a payday loan. Be sure to compare all costs.
The following states prohibit payday lending:
The District of Columbia
These following states permit payday loans, but at much lower rate than normally seen in payday lending and with more lender oversight:
If you’re having any trouble with payday lenders or feel you may have been scammed, report this to the FTC by calling toll-free at 1-877-FTC-HELP (1-877-382-4357).