Consumer Car Buying Advice Blog

While a payday loan may seem like a good way to get cash when you need it, there are better alternatives out there, even for consumers with bad credit.

What are Payday Loans?

Here at Auto Credit Express, we want our customers, many of whom have had or are having financial problems, to be aware of what payday loans are. The fact is, payday loans are loans that are secured by information on your paycheck and verification of your employment. They are meant to appeal to people who need cash quickly and have no other way to get it. In order to qualify for this type of loan, you need a job and some type of income verification (your employer can’t be paying you under the table with cash. Typical loan amounts range from $100 to $500, while the duration of the loan is usually 2 weeks. Interest rates are loosely regulated by the states for these amounts and average 30% per month (and no, that was not a typo). In addition, the loan company usually charges an origination fee. Many of the storefront locations these companies operate out of also offer check cashing services, pawn loans and car title loans.

A Typical Payday Loan Scenario

Let’s say you take out a $200 payday loan. You give the loan company your employment information and a copy of your last pay stub. You pay them the $15 origination fee and sign a document that says you will pay them $30 in interest (30% per month) plus the $200 in principal in 2 weeks. If you don’t have the entire amount in 2 weeks, the loan company will allow you to roll over the loan for another 2 weeks, provided you pay them the interest amount. Most states will allow this type of rollover to occur at least eight times.

What is the true cost to borrow the money?

Well, let’s take a look. If you ended up rolling over the loan six times, for a total of 2 months, it would look like this:

1.    $15.00 in origination fee plus
2.    $90.00 in interest charges

This amounts to a total of $105.00 in interest and charges to borrow $200.00. This equates to an annual interest of over 50%. That’s right. You just paid 52.5% in interest charges. One other thing: if you don’t pay the principal back, the loan company can garnish your wages – which can be quite embarrassing, to say the least.

Better options to payday loans are avaiable
Alternatives to payday loans should have these features:
•    At least a 90-day repayment term, repayable in installments;
•    No personal check mechanism or other unfair collateral
•    Reasonable limits on renewals (If borrowers are renewing short-term loans more than four times per year, the loans are not helping them);
•    Full consideration of the borrower’s ability to repay the loan
•    No mandatory arbitration clause.
With payday alternatives, borrowers pay late fees or penalty fees only one time. This scenario forces payday loan borrowers to pay fees (or high interest rates) every two weeks. In the end, revolving payday loan fees increase debt loads and financial hardship, leading people into bankruptcy. They do little to help them get back on their feet – much less reestablish their credit rating and FICO score.

Work out a payment plan with creditors

The best alternative to payday loans is for consumers to deal directly with their debt. Many creditors will negotiate partial payments if a payment plan is in place. Working out a payment plan with creditors can allow the consumer to adjust billing to pay off bills over a longer period of time.

Advances from Employers

Some employers will allow paycheck advances to employees. Because this is a true advance, and not a loan, there is no interest and the advance is much cheaper than a payday loan.

The Bottom Line

Payday loans are a type of lending that is (not to put too fine a point on it) predatory and should be avoided by consumers at all costs. Think carefully about signing any document that could cost you high interest fees as well as the loss of your only means of transportation.

If you have had bad credit in the past and you need to reestablish your car credit and raise your FICO score, we can help. Visit our helpful web site at www.autocreditexpress.com.

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