What to Think About When Considering a Payday Loan
As summer heats up, quite often so does our spending. From big vacations to day trips to the water park, from new grills to furnace repairs, or from shopping for back-to-school clothing to having to replace the cell phone we just dropped into the neighbor’s pool, summer can be filled with expenses that are unexpected and/or unscheduled.
At such times, it might be tempting to run to the convenient lender of your choice: payday loans, title loans, pawn shops, or even rent-to-own stores. Each of these options charges substantially more money for small, short-term loans and purchases than traditional lenders. If you annualize their fees, they can vary from 50% APR all the way into the 400% APR or more range. That means that on a typical 2-week loan of $500, the fee might very well amount to $80. If you were to renew that loan (extend) beyond two weeks, it could take less than three months for the fees to exceed the original balance of the loan. Yikes!!!
Here are three questions anyone needs to ask themselves before ever considering such expensive loans:
- Is the lender even registered?: Check with your state’s department that regulates payday lenders. This is often a department of finance or of financial institutions, but it might also include bureaus and offices in other state government departments. If the payday lender is not registered to do business in your state, loans which they make may not be legal or binding upon you as a borrower. Check with your state regulators for details.
- Do you know your rights?: Unfortunately, with each state regulating non-traditional lenders (payday, title, pawn, etc.) differently, it is impossible to condense your borrowing rights into a single educational post. However, you should check with your state’s regulatory department to learn what limitations your state’s legislature has put on consumer lenders. For example, in Idaho (a state with very few limitations on payday loans), payday loans may be renewed just 3 times.
- Are there any alternatives?: Before taking out a payday or title loan, understand the alternatives available to you: borrowing from family or friends, signature loans at your bank or credit union, a person-to-person loan online, or even taking a cash advance on a credit card. Any of these options should cost a lot less than the $80 a payday loan will end up costing. Approaching a family member or friend to borrow some money usually feels degrading and frustrating. But what if you offered them the chance to earn significantly more interest than they could make in the stock market. Even if you were willing to pay 100% APR on a 2-week loan (which, keep in mind, could be in violation of your state’s usury laws), that would amount to $20, which is one-quarter the amount you would pay on a payday loan. Perhaps your family member or friend would consider a smaller fee. Just make sure you put everything in writing, regardless of how strong your relationship is. There are a number of free promissory notes available online, such as one on Suze Orman’s site, but check out NOLO’s suggestions about Promissory Notes for Personal Loans to Family and Friends for what to include.
While I’m not going to say that payday, title, and pawn loans are NEVER a good idea, I can pretty confidently say that most such expensive loans are poor financial moves. If there are alternatives, the chances are that those alternatives will be more affordable and less damaging in the long-term.
Do You Have Questions About Payday Loans?
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Director of Education