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How to avoid payday loan scams

[Jun 2, 2011.]

 

The federal government's Truth in Lending Act requires that lenders, regardless of whether they are offering a traditional loan, extending credit or providing a quick payday loan, provide specific information to borrowers.


Payday loan disclosure requirements


Before you sign any payday loan agreement, make sure the lender has provided the following information:



  • The amount of the finance charge in dollars

  • The annual percentage rate (APR), which should be written in percentage form on an annual basis

  • These terms must be given to you in writing


In some states, laws have been passed that restrict the amount of interest that can be charged. Be sure to check out your state laws before you take out a payday loan.


How payday loans work


Payday loan providers usually have you write a check made out to the lender that includes the amount you are borrowing and the total fees. The check is held until your next payday, or you can opt to roll the amount over and borrow again. This is where many payday loan borrowers get into trouble and have too many payday loans that they cannot repay.


Here's an example of a payday loan: If you need $100 so that you can purchase prescription medicine for yourself or your child, you can borrow that from a payday lender for a fee, such as $15. When you are paid next, the loan is repaid when the lender cashes the check. The APR for a fee of $15 on $100 is 400 percent, which is clearly a lot higher than a typical loan or credit card rate. But as long as you repay that money when it is first due, you won't have spent an enormous amount in interest. However, if you cannot repay the loan, the interest is added each time the check goes uncashed, so waiting for four weeks will cost you $60 to have borrowed $100.


Too many payday loans


To repay a single payday loan, you need to be disciplined and make sure you have budgeted for the check that will be cashed. A bounced check will not only trigger a new payday loan with added interest, but your bank may charge you an overdraft fee.


If you find yourself with a massive amount of payday loan debt, you may need professional help. Consult a non-profit credit counselor to see what actions you can take to get your finances back on track.




 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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