Payday Cash Advances and Your Finances

2006-05-12

The payday cash advance business didn't exist 15 years ago, but today there is a payday cash advance store on every corner. Many people use these short-term, unsecured loans to help fill the gaps until payday. These loans serve as a successful solution to cash emergencies like car repairs, hospital stays, groceries, and other unseen expenses. Sounds to good to be true? Maybe or maybe not. Let's explore in more detail.

Many payday cash advance loans carry an average annual percentage rate (APR) of 474 percent with some lenders charging rates as high as 800%. Payday loans can result in a vicious cycle that many end up borrowing from Peter to pay Paul, having to go from store to store to keep the checks clearing.

The payday loan industry paints a pretty picture. We see the ads on TV of middle-income families who need cash fast for emergencies. But the reality is that most middle-income families have lower cost options to solve temmporary cash-flow problems. Most of the customers are lower income families with bad credit and little options to choose from. It has been estimated that lower income, urban areas have an average of three times as many payday loan locations as in suburban areas with higher median incomes. Many of the customers have an annual household income of $25,000 to $40,000.

State and federal governments have launched inquiries into the predatory practices of payday lending stores. Some 20 states have capped the interest rates that lenders can charge. But despite these regulations, many financial experts say there is a need to educate consumers to steer clear of spending beyond their means.

Here are some facts that financial experts say about payday loans:

Know what your financial alternatives are
While sudden emergencies usually constitute the single-largest reason for most payday cash advance loans. The problem is most people don't define an emergency the same way. If you have a genuine financial emergency, a payday loan may be your best option. But weigh all your options. If you have bad credit, no cash in savings, no immediate access to lower cost credit - like credit cards, than maybe a payday loan is the way to go.

Know the real cost of payday loans
Let's say you need to borrow $100. The fee for the loan is $15. So you write them a check for $115.00 and postdate your check for their next payday. The perception is that this is a reasonable cost. But the reality is, because you only borrowed the money for two weeks, you are paying a triple-digit interest rate. Lenders don't help customers understand things better and in some cases have even provided consumers with false or misleading information about the cost of obtaining a payday loan.

Understand all the risks
A payday loan is not simply a paycheck advance. The industry has frequently uses the term "payday advance," and many customers don't understand that this is a credit transaction. Many payday stores require borrowers to agree to mandatory arbitration for payment disputes. This means if your check doesn't clear the lender could garnish your paycheck if you don't pay off the loan payment as agreed.

Payday loans have there place in the financial world, but do yourself a favor and throughly check out the lender you do business with. Be sure to read the fine print on your no fax cash advance contract and be sure your lender is following state and federal guidelines.

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