Monday, January 20, 2014

Know Pros and Cons before Securing a Payday Loan

Q:        What is a payday loan?
A payday loan is a small loan, often between $300 and $500, which is based on your income and requires evidence of a job (paystub). A postdated check is generally required as collateral for the loan, but even without one, you may be able to get a smaller loan. The payback date is based on when you are paid, so it may be one week, two weeks, 15 days or one month from the date of the loan.

Q:        Who provides payday loans?
A:        Payday lenders are for-profit businesses found in every neighborhood. They are in business to make money for their owners and/or shareholders (as opposed to nonprofit organizations, which operate under a mission to benefit the “greater good” and cannot use their funds for anything else).  

Q:        What are the advantages of getting a payday loan?
A payday loan can get you cash quickly, without the credit checks required for other types of loans. Generally, you must provide a postdated check and some verification of income, as well as a phone bill in your name.

Q:        What are some disadvantages?
Payday loans carry an extremely high interest rate, generally more than 300 percent. For example, you might borrow $200 on February 1, and write a $225 check postdated for February 15.  This may not seem like a lot to pay when you are desperate, but the interest rate you are paying is very high for two weeks’ worth of borrowing. If you cannot make good on the postdated check, then the loan might be rolled over, which means you will be paying interest on the original interest amount you owed.
            Also, if you use a postdated check to secure a loan, you may incur an additional “NSF bank” (insufficient funds) charge of $35 if there is not enough money in your checking account to cover your check on the loan’s due date. Payday lenders sometimes submit postdated checks more than once over several days, generating multiple NSF fees and increasing your overall cost.

Q:        Can I pay off a payday loan in installments?
A:        No. These loans are designed to be paid back in a single payment.

Q:        What happens if my payday loan is rolled over and I still can’t pay it off?
A:        The loan will remain an outstanding debt, which means that the payday lender can sue you in court to get the money you owe. It is wise not to roll over your loan, since it increases the amount of money you owe.

Q:        If I’m willing to keep adding interest to my loan, how long can I keep the payday loan money before I have to pay it off completely?
A:        You can roll over a payday loan at least four times, which would give you approximately two to three months to pay the loan off completely.
Q:        If I decide that a payday loan costs too much in interest or is too risky, what are my alternatives when I need money on an immediate, short-term basis?
A:        For a less costly alternative, try getting a loan from a bank, a credit union, a finance company, a friend or relative, or asking for an advance from your employer. You might also consider using a pawn shop. Some people have been using auto title loans as an alternative, but the interest rate for an auto title loan is likely to be at least as high as for a payday loan, and you would also be putting up the title to your vehicle as collateral for the loan (meaning that you could lose your car if you don’t pay off your loan).   To get help so that you can avoid this type of problem in the future, you may want to consider getting financial counseling from a nonprofit debt counseling service.  

Q:        I just took out a payday loan. The lender said it would be a criminal offense if I didn’t have sufficient funds in my account on the due date. Is that true?
A:        Because your check was postdated, the lender would NOT expect you to have sufficient funds on the same date you gave the lender your check, and if you don’t have sufficient funds on the due date, the lender could roll over your loan. You would not be committing a criminal offense unless you gave the lender a check knowing you would have no funds to cover it on the due date and you clearly intended to defraud the lender.

This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by Akron attorney Terry Zimmerman of Kaffen & Zimmerman. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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