Payday Loans (Check Loans)

What are payday loans or check loans?

Some lenders give small cash advances in exchange for a post-dated personal check. They agree to hold these checks until the borrower's next payday. That explains how the loans got their name. It also explains the newer names "check loan" and "check advance." They usually are for between $100 and $500.

Some lenders pretend they do not loan money. Some say they offer "deferred deposit services." Others act like they are selling something. But the bottom line is they give money one day that is not due until some future day. They charge a big fee to do this.

Who uses payday loans?

People strapped for cash take out payday loans. They think they can solve a short-term need for cash. Unfortunately, they usually have to renew the loans. They soon find themselves in a much deeper hole than when they first made the loan.

Why shouldn't I take out a payday loan?

There are several reasons:

• The lenders charge a big fee for taking the post-dated checks. This fee may be as bad as paying interest of 600% on the loan. This comes to more than ten times as much as Alabama's Small Loan Act allows. Unfortunately, a court found that payday loans do not count as small loans. On the last day of the 2003 session, the Alabama Legislature passed a law legalizing many kinds of pay day loans. Payday lenders can keep taking advantage of desperate people and making a big profit.
• Most people who take out payday loans cannot pay them on time. They often have to extend the loan, which means paying another fee. Then, they have to do it again. As a result, they end up paying far more in fees than what they borrowed and still owing all the money they borrowed. This puts them in worse financial shape than when they started.
• Payday loans shift family income from basic needs to loan fees. This speeds up family financial ruin.
• Families don't get help from one payday loan. The average payday borrower takes out eleven loans per year.

Look at an example:

You write a check for $230 to get a two-week $200 payday loan. If you cannot repay the loan at the end of two weeks, you extend for another two weeks by paying another $30. That comes to $60 in fees for a four-week $200 loan. It's easy to see how these fees can quickly add up. If you extend the loan ten times, you will pay $300 in fees without making a dent in your original $200 debt.

• Many lenders turn your check in as a worthless check. Since the payday lenders know the check is not good when they take it, the District Attorneys should not prosecute. However, many times a Worthless Check Unit will send a letter threatening to bring charges if you do not make the check good - and pay extra charges.

How can I get the money I need without taking out a payday loan?

• Ask your employer for an advance on your paycheck.
• Ask a friend or relative to loan you money.
• Find out if you have, or can get, overdraft protection on your checking account.
• Find out if you can delay paying a non-interest bill such as a utility bill and make payment arrangements with the utility company.
• Ask your creditors for more time to pay your bills. Find out what they will charge for this service - a late charge, an additional finance charge or a higher interest rate.

What if I decide to get a payday loan?

• Borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the following payday.
• Always comparison-shop before selecting any loan. Compare the finance charges and any penalties for all credit offers to get the lowest cost.

How can I plan for the future?

• Make a realistic budget.
• Put aside some savings so you can avoid borrowing for emergencies and unexpected expenses.
• Call your local nonprofit consumer credit counseling service if you need help figuring out a monthly budget or working out repayment plans with creditors. You can also check with your employer, credit union or housing authority about no-cost or low-cost credit counseling programs. Beware of credit counseling programs that spend a lot of money advertising on TV and radio.

What if I have a payday loan now?

You should try to pay the debt right away. Then stay away from payday lenders. Warn your friends and family of the problems with payday loans. Borrowing more money at triple-digit interest rates is like throwing gasoline on a fire.

Reviewed April 2004

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