If you have no access to credit and
need a quick loan, you may consider a payday loan. The idea sounds attractive:
the lender deposits up to $2,000 into your bank account and the loan is
automatically repaid from your next paycheck. You don't need collateral and
there's no credit check.
But before you walk into the payday
loan office, do your homework. Here are some crucial facts you need to know.
1. What is a payday loan? According
to the U.S. government, a payday loan is defined as "a closed-end credit
transaction, unsecured by any interest in the consumer's personal property and
excluding any credit card transaction under an open end consumer credit plan,
with a term of 91 or fewer days in which the amount financed does not exceed
$2,000 with a finance charge exceeding an annual percentage rate of 36%."
In other words: short-term, high-interest.
To ensure repayment, the lender will
require that you present a personal check for the total amount borrowed plus
fees, or that you sign over legal access to your bank account for the total
amount due. Your check is post-dated to your next payday. On that day the
lender will cash the check or debit your bank account. This gives the lender an
automatic repayment mechanism and the legal right to collect.
2. Are payday loans legal
everywhere? No! They are regulated by individual states. In some states they
are illegal.
They are also illegal for members of
the U.S. military. One of the provisions of the FY 2007 Military Authorization
Act makes it against the law for lenders to make payday loans and/or car title
loans to military personnel. Lenders are also prohibited from charging more
than 36% interest to military borrowers. When calculating the interest rate,
additional renewal charges, fees, service charges, or credit insurance premiums
must be included.
3. What are the interest rates for
these types of loans? Very high! Why? Because the lender typically requires
only that you have a job and a bank account for the past sixty days. Payday
loans are most often made to people who have poor credit and no collateral.
These high-risk borrowers pay interest rates that can be as high as 600% APR.
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