When you’re short on cash or face an unexpected crunch,where can you turn for money? Pay Day Loan Shops have been part ofthe landscape for about the last twenty years, and they can put money in your pocket,fast and easy. However, the habit ofbailing yourself out at cash shops is not only expensive, it can lead topersonal disaster.
Let’s say you need $500 for unexpected car repairs. You don’t have that amount handy, the garagewon't extend credit until your next paycheck, and you need a vehicle. You can walk into most pay day loan shops,write a postdated check (usually 14 days) for a little more than the amount youneed, and walk out with the money. When yourpostdated check comes due, the loan store cashes it. As long as the money is in the bank, everybody’shappy and things work out for everyone: You got the car repaired in a timely manner, the garage earned itsmoney, and the pay day loan shop did its job and made a profit from the deal. Pretty simple.
People run into trouble with pay day lenders one of twoways. First, if the money isn’t in thechecking account when your postdated check comes due, you have a problem. Most shops will let you “roll over” the checkfor another two weeks, but that comes with an additional fee, so the loan iscosting more money. While laws limit thepossibility, some people have rolled over minor loans into major debts. Others go from one loan store to the next,using one lender to pay off another, all the while rolling up increasingdebts. The second problem comes whenpeople use the shops as a reflex, too often, too easily. Using loan shops too freely is bad for yourpersonal finances, and outside of real emergencies, there are few things thatcan’t wait a couple of weeks until you can afford them out-of-pocket. None of this is to say that pay day loanshops are bad guys. If you use the loansirresponsibly, it’s not the shop’s problem. It’s your personal responsibility to recognize the risks and expenses.
Having talked to a few providers of these loans, one couldsay that pay day lenders are serving a market that regular banks havetraditionally ignored. Other than pawnshops (which require physical collateral for the loans they provide), loanstores are the only game in town for a lot of people who don’t qualify for aconventional bank program – and for the amounts of money we’re talking about, amortgage or bank loan isn’t practical. Asfor the rates they charge, where else can you get cash on the promise of acheck that is admittedly not worth the paper it’s printed on today? Pay day loans get a bad rap sometimes, andthere were a lot of shady characters operating in the industry before theFederal Trade Commission and state regulators focused on the business andprovided rules. The bottom line is that,for people in tough situations, they are the only way out. Given a thin economy, pay day lenders havekept thousands of people afloat when they couldn’t make ends meet.
The Truth in Lending Act says that lenders must disclose thecost of the loan, give you the finance charges (which would appear as a dollaramount) and the APR in writing before you sign the deal or submit your postdated check. The APR can be based on several factors, suchas the amount borrowed, the rate and credit costs as well as the length of theloan period. So, as long as the shopsare doing as they should to comply with the laws, they’re covered, but if youlook at the allowed charges and the Annual Percentage Rate – the real cost ofthe loan can run as much as 300% interest for those two weeks – and that’s alot, no matter how much you’ve actually borrowed or paid out.
Pay day loans are expensive, but if you understand yourobligations and have hit the wall when it comes to an unexpected debt, they canbe an effective way to solve a short-term problem.
