Payday Loans: Loans That Just Don't Pay to Get

Here's a great article about Payday loans from a Navy Knowledge Online posting of a Lieutenant Nuzzo. This is essentially Nuzzo's article verbatim with exception to the removal of several phone numbers. This article is useful to non-military also.

Payday loans. Cash advance loans. Deferred-deposit check loans. Postdated check loans. Within miles outside the gates of any military installation you are sure to find institutions making these offers to service members who they know will some day look for a quick answer to their financial woes.

But quick convenience often comes at a long-term price.

The search for such quick loans can, and often does, lead to spiraling problems that end up with a visit to the Legal Service Office, a financial consultant, or worse. In addition to all the credit related problems faced in the civilian world, service members must also consider the impact of their financial responsibility on their careers. Creditors might seek to involve a command, obtain a garnishment of wages or other practices that may eventually cause the loss of a required security clearance.

And these are just a few of the considerations.

The good news is that these problems can be avoided when you, the consumer, educate yourself and plan for unforeseen pitfalls that lie ahead.

Legitimately run pawnshops, check cashers, convenience stores and even some Internet companies offer a variety of loans that can go by a variety of names, but which all work in essentially the same way. Typically, a borrower will write a personal check payable to a lender for which they receive cash. The amount of the check is normally for the amount the borrower receives, plus a lending fee. From here the process can work in a variety of ways. Some lenders may hold the check until the member’s payday and then automatically deposit it. Other lenders may require the borrower to return to pay them - in cash - an amount equal to the total, in exchange for the check.

Lenders always allow borrowers to extend their pay off time by “rolling over” the loan. This is a huge benefit to the lender because they merely extend the amount of time in which the loan can be paid off in exchange for another lending fee. Essentially, the lender makes more money off the borrower without taking on any more risk by lending more money out. This way the lender gets more money for doing nothing more than it already had done. The rollover is invariably a very profitable win-win situation for the lender.

Let’s consider a brief example of this process in action: A borrower needs to borrow an amount, let’s say $100.00. An average finance charge payday loan lenders charge for a two-week loan on this amount is around $15.00. When this amount is converted into an annual percentage rate (APR), this loan is being given at a staggering 391% rate. Compare this to the rates of 7 to 20 percent consumers find with most credit cards (even high interest rate ones). Now, if the consumer rolls over the amount for just one period, the finance fee doubles. Borrowers can quickly find themselves facing 400%, 500% or even 1,000% APRs on the amounts they borrow. Put another way, rolling over this finance charge just three times in just over one month’s time –six weeks – would cost a borrower $60 to borrow the $100.00.

Couple these interest rates with bounced check fees and other penalties that both the lender and your financial institution can charge, and the potential costs of payday loans really start adding up. Additionally, lenders normally threaten late borrowers with criminal prosecution for writing bad, or “hot,” checks, which they may legally pursue even if they knew you wouldn’t be able to repay the money when they lent it to you. Often, a borrower will find themselves getting sucked into the quicksand of rolling over their loans and fighting just to pay the loan fees.

There are several practical ways to combat the payday loan problem, and everyone can do it.

- Shop for the credit you accept. Research potential lenders through the Better Business Bureau online (www.bbb.org) to see what their consumer track record is like. Pay close attention to APRs. While a percentage point or two does not seem like a lot of money, over the long term it adds up to hundreds, if not thousands of dollars. For example, a five year loan of $5,000 at 9.5% racks up $1,300.56 in interest over the life of the loan. The same loan at 7.9% accrues on $1,068.57 in interest, a savings of nearly $250. Free online interest calculators are available at sites such as www.bankrate.com and other websites.
Also, ask the lender you choose whether there are fees or penalties for early payoffs. These fees can be just as damaging as a high interest rate but remain hidden until you attempt to pay off the loan early.

- Develop a debt repayment plan with a free consumer credit counseling service. Often these programs are available at little or no cost through your bank, credit union or housing authority. Consumers may find services like this online, too. Be very cautious with what you find on the Internet, though. Don’t jump at the first one or two you come across. Research them. You should be careful in selecting these organizations, as you should be with any company which directly affects your credit.

- Call your existing creditors and ask if they can work with you to lower your payments. Most creditors are willing to discuss making adjusted payments in times of hardship and may do so with a minimal finance charge or possible no cost. You may be surprised to find that a one-month late fee on your credit card is actually less than the interest of a payday loan. Be careful though, some loaning agencies may have an acceleration clause in their contract with you, which would make the entire principal of the debt due immediately if you miss or are late on a payment. Also, some credit card company contracts provide for increased interest rates on credit cards under the same circumstances.

- Consider getting a small loan from a family member or friend. For obvious reasons, you should not be borrowing more money than you can afford to pay back, but this can be a interest and fee-free solution for you in a pinch. When and if you do this, remember that people expect you to honor your commitments in a timely manner. Don’t abuse someone else’s kindness by getting into a situation where you know you can’t repay an amount when you enter into the debt.

- Plan ahead. Start looking for solutions before you get into problems. Put off making a non-essential major purchase for several months if money is tight. Buying something expensive that you cannot afford will likely end with that item being repossessed and you being stuck with a valid debt on some amount a creditor couldn’t raise at a repossession sale. Consider looking into fixing things rather than buying new.

- The Navy/Marine Corps Relief Society makes interest-free loans to service members who can show a particular need. Their representatives can assist you with an application in an emergency, such as a death in the family, unexpected auto repairs or other calamities.

Military service members can contact the NLSO if you have any legal questions about payday loans.