Payday Loans

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Payday Loans…

Here’s how they work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically. The loan amount is due to be debited the next payday. The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”

A Payday Loan

That is, a cash advance secured by a personal check or paid by electronic transfer is very expensive credit. How expensive? Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. If you agree to electronic payments instead of a check, here’s what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

If your credit rating is below 630, you may have trouble obtaining a personal loan from traditional lenders, but it doesn’t have to keep you from getting a personal loan. Some online lenders cater specifically to people with poor credit. These companies consider your credit scores and history when deciding whether to loan you money

While personal loans from reputable online lenders can be good options for many borrowers, The Consumer’s Guide  recommends you first consider your local credit union. Most credit unions offer flexible loan terms and lower interest rates than online lenders, especially for people with bad credit.

If you can’t get a loan through your local credit union, we recommend you compare offers from multiple lenders before signing any loan agreement. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to next payday.

Note: The Consumer’s Guide does not recommend any company, product or offer. The Consumer’s Guide provides consumers with easy access to information and offers to allow you to make informed decisions. The consumer should always do their due diligence, shop around and seek professional advice prior to making any decisions.

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