The following information may or may not be applicable to a payday loan company which you have dealt with in the past or may deal with in the future. This is based upon my experiences having worked for a short term lender, anecdotes from acquaintances, various websites for short term lenders, the Federal Trade Commission of the United States of America and various consumer watchdog groups. I have no knowledge if such services are available outside of the North American continent.
Lenders would rather you think of their service as short-term loans. Payday loans put people in the mind of waiting for hours on end in a dingy check cashing place populated with undesirables. The term short term loan puts people in the mind of dealing with a real bank or lending institution rather than a privately held company which isn't a bank. The customer only has to call or visit a website to get an application to submit their request to the processing department.
People around America are flocking to these companies to borrow anything from a hundred bucks to four hundred bucks. Nowadays some of these companies lend up to one thousand dollars. When one gets into that high-end territory the money's familiar nomenclature changes from bucks to dollars.
Rates vary depending on your state or local legislation. Some companies have rates as low as fifteen dollars per hundred while others charge as much as thirty dollars per hundred to the consumer. The reasoning behind such rates and outrageous annual percentage rates for loans is the borrower shouldn't keep these loans out for a long time. In practice this is not the case. Customers keep these loans out for weeks or months because they didn't have the money in the first place. On average people have one or two loans out at once, sometimes borrowing from another lender to pay off a bad debt with the original lender or to float the loan until they can get their collective finances in order.
There are a few types of payday loans. Some loans insist that they be paid in full within fourteen days. Deferred deposit loans have the customer write a post-dated check for the amount the customer wants to borrow including the fee. These types of loans are the kind one gets at storefront check cashing places or places that just do short term loans. A new trend in the payday loan industry is payday loans where the customer can pay back the loan taking as much time as necessary as long as they stick to the terms given on the disclosure statement. These are quite lucrative. The application process requires the customer to present id and a paystub or proof of benefit income. There is never any credit check which makes this an attractive solution. Other lenders ask for voided checks and bank statements to ensure they are lending money to someone who can pay it back. These companies only deal with checking accounts and all transactions are done via ACH which can be convenient for the customer. Every payday the customer is debited for an amount based upon the principal remaining on the loan or however much extra the customer decides to pay towards the loan. The fee is not a one time fee since this is how the companies make their money.
For example: Mr. Average is in a jam and needs to borrow four hundred bucks to tide him over to his next payday.
Ka-ching!
He's approved and accepts the terms of fifteen dollars per hundred. The money's deposited into his account the next business day. Mr. Average, per the disclosure statement, is allowed to extend the loan five times by paying only the fee before having to start paying off the loan. Things are tight for our pal so he has to pay the bare minimum so he can get back on his feet. The first five extensions or refinances alone are three hundred dollars! Now he has to start paying down on the loan until it's paid off which will be another $670. By the time the loan is paid in full Mr. Average would have spent more than twice the amount of the original loan.
How does one avoid a situation like this?
Now if you really must get a payday loan keep the following in mind:
cites:
http://www.ftc.gov/bcp/conline/pubs/alerts/pdayalrt.htm
http://www.consumerfed.org/backpage/payday.cfm
my math
the first five extensions $300
400 + 60 fee 110
350 + 52.50 fee 102.50
300 + 45 fee 95
250 + 37.50 fee 87.50
200 + 30 fee 80
150 + 22.50 fee 72.50
100 + 15 fee 65
50 + 7.50 fee 57.50
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$670
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$970 total