Each year, about 12 million people in the United States in need of quick access to cash take out payday loans, often spending billions on principal, interest, and fees. Payday loan borrowers spend approximately $7.4 billion annually at 20,000 storefronts and hundreds of websites, plus additional sums at a growing number of banks. The loans are a highly controversial form of credit, as borrowers find fast relief but often struggle for months to repay obligations marketed as lasting only weeks.
Payday loans are also known by other names, including cash advance loans and check loans. People have different reasons for taking out a payday loan. But before you consider using a payday loan, make sure you fully understand all the loan features involved.
Payday loans are typically small-dollar loans, for example, $500. They generally have higher interest rates and fees than other types of loans. For instance, a typical two-week payday loan with a $15 per $100 fee would have an annual percentage rate (APR) of almost 400%. Borrowers typically promise to repay the loan with their next paycheck. In some cases the loan is structured with payments over a longer period of time.
The loan funds may be disbursed to consumers by cash or a check, loaded onto a prepaid debit card, or electronically deposited into a consumer’s checking account. To repay a payday loan, the borrower usually must give advance authorization for the lender to access his or her credit union or bank account or write a post-dated check.
Payday loans are often characterized as short-term solutions for unexpected expenses, like a car repair or emergency medical need. However, an average borrower uses eight loans lasting 18 days each, and thus has a payday loan out for five months of the year.
In the August edition of Better Banking, we’ll hear more about payday loans, why they’ve become popular with so many people, the consequences that come when payment cannot be made, how they are impacting residents of Rhode Island, and where one can go to find payday loan alternatives that have the interest and safety of the borrower in mind… not the lender.