Payday Loans
Payday loans are pretty common these days, with more and more borrowers each
year and lots of media coverage. While consumers should always be wary of loan
terms for any type of loan, borrowers who take out payday loans must
especially be aware of what they are getting into so as not to incur more debt.
Lately consumer advocate groups have put a spotlight on the payday lending
industry, citing high interest rates and fees. Let's compare payday loans to
other options available to folks who find themselves short on cash between
paychecks.
Sometimes Payday Loans are the Best Option
Payday loans are meant to be financial solutions to temporary cash flow
problems, and not fixes for chronic budget problems or long-range cash flow
troubles. People take out payday loans for emergency reasons such as unexpected
medical bills or car repairs. If you have a bill that must be paid immediately
and you haven't budgeted for the expense, then your options are limited. You
could borrow the money from friends or family. This is preferable if it works
for you, but it's not an option for lots of people. Whether the reason is
dignity, pride, or difficult relations, borrowing from friends and family just
isn't an option for so many people.
Bounced Check Fees are Costly
Another option for those strapped for cash with an emergency situation, is to
write a check and hope you get the money into your checking account before the
payee cashes the check. Maybe you can hold them off for a few days until your
bank refuses to cash the check. Then you get bounced check fees. We all know
that bank fees have been rising for years now. The average bounced check fee at
banks is now $22, and up to $30 in New Jersey. On a $100 bounced check, that
comes out to an APR of 573%! Compared to the $15 fee on a $100 payday loan,
which figures out to 391%, the payday loan is a better option.
Overdraft Protection Can be Costly, Too
Some people have checking accounts with overdraft protection. So, in order
to avoid bounced check fees when they face a financial crisis, they will simply
write a check or use the ATM for that checking account, and let the bank's
overdraft protection system cover the shortage. This may seem like a good idea
at first, but when you compare overdraft protection interest rates and fees to
those of payday loans, you might reconsider.
How to Compare APRs
In fact, banks have an unfair advantage when it comes to comparing interest
rates and fees with those of payday loans. The method of comparison needs to be
explained, since bank overdraft programs are not covered by Truth in Lending
laws. Payday loans are, however, so have to reveal all their fees and
interest rates and terms up front. This means that payday loan lenders have to
treat their fees as interest, figuring into the APR. That's one of the reasons
the APR looks so high for payday loans. Overdraft protection doesn't have to
figure their fees into the APR because again, they are not covered by Truth in
Lending laws. This is because they consider overdraft to be a 'courtesy
service', not a loan. Their fees are considered 'noninterest income'. In the
past few years, banks' noninterest income has increased by up to 39% from the
overdraft protection programs. Other names for the overdraft protection program
at banks are euphemisms such as bounce protection, overdraft privilege, and
courtesy overdraft. These days banks are even promoting these programs as short
term loans, after seeing how popular payday loans are. They even promote the
overdraft protection as a way to cover expenses between paydays!
Bank Fees
Going beyond promoting the overdraft protection programs, banks are generating
income with the programs by essentially tricking their customers into using
overdraft protection. For example, at an ATM, the balance in a checking account
will show how much you have, plus the overdraft amount you are entitled to.
This makes the customer think he or she actually has that much cash in the
account, therefore overdrawing the account. Yikes! Another trick of the banks
is that they will cash your largest check first, rather than going by date on
which is was written. This way, your account gets drawn down more quickly and
you get charged more fees.
So, when you consider the interest rates of payday loans compared to your
bank's overdraft protection program, keep these facts in mind. Armed with
information, you can make the best financial decisions.
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