Before asking if a payday loan is the right decision, a person needs to ask some hard questions:
1. What is a payday loan?
2. How does it work?
3. What are the rights of the consumer when taking a payday loan?
4. What happens if I cannot pay the payday loan?
5. What are my alternatives?
6. What are the laws in my State regarding payday loans?
Payday Loans are short-term, extraordinarily high-interest loans. With each lender, there is a blurb at the bottom of the loan documents that might say that these loans are not meant as a long-term fix for financial problems, but what it doesn’t say is that the short-term loan can turn into a long-term process where the borrower never gets out of the cycle.
The loan works as follows: A borrower is lent money on the premise that the borrower will pay back the money plus a finance charge on the next payday. If the borrower cannot pay, the borrower can then opt to “refinance” or “renew” by paying the finance charge only. In many states the percentage on the finance charge is in the three digits. For example, a loan for $300 has a finance charge of $90.
This practice puts the borrower into a treadmill where each payday, the borrower renews by paying the finance charge but never pays down the principal. Consequently, the borrower gets farther and farther behind on other expenses because the payday lender is getting money on every payday.
So a person needs to ask this basic question before getting that payday loan: If I get this loan, will I be able to pay in full on my next payday? If the answer is No, then the person should NOT get the payday loan. It is better to work with an alternative than get the payday loan.
As to the rights of the consumer, there are a handful of states where payday loans are strictly prohibited (Georgia and Maryland) and other states in which there is a cap on payday lending finance charges. However, with the Internet, payday companies try to get around such laws. Also, payday lending companies often target the most vulnerable of our citizens.
The problem with payday lending is that the regulation varies from state to state. Consumers have to ask questions because the lender is not going to be upfront about the hidden costs.
My experience with Payday Lending is this: Do not do it unless you absolutely have no alternative. And even then, ask if there is another alternative.