It happens to a lot of people: Your finances are OK—you’re paying all your bills and meeting other obligations—and then something unexpected (and expensive!) happens. You may feel you just need some extra cash until payday, and you might think taking out a payday loan will solve your problems.
How It Works
Payday lenders allow borrowers to take out short-term loans to tide them over until their next paycheck, which is why the loans are known as payday loans. If you opt for this type of loan, you’ll probably be asked to write a post-dated check (dated when the loan payment is due) or agree to allow the lender to take the payment directly from your account. Keep in mind, you won’t be making several small payments. You’ll be expected to pay the whole loan, plus the interest/finance charge, all at once.
Before signing on the dotted line—and maybe leaving your finances in worse shape than before—here’s what to know about payday loans.
Costs Can Mount Quickly
Most payday lenders charge a flat fee, but their loans are a lot more expensive than other types. For example, a lender may charge $15 to borrow $100. That doesn’t sound too bad if you pay back the loan on time. But, what if you don’t have the money to pay off the loan when payday rolls around? You may decide to renew the loan. That means you’ll pay another $15 fee. Now you’ve paid $30 to borrow $100, and that’s assuming you pay on time.
Each time you roll over the loan, fees add up and it gets tougher to repay. In fact, according to a recent CNBC report, payday loans could cost you as much as almost 700 percent in interest—way more than you’d pay with other types of loans. (Credit card companies can charge between about 12 and 30 percent.) How does that happen?
Let’s look at a real-world example reported by NPR. One woman borrowed $600 from a payday loan lender and was charged an additional $76.45 for a loan that was due 2 weeks later. The $76.45 represented an annual interest rate of 300 percent. If she had kept the loan for a year at the same interest rate, at the end, she would have owed $1,800—in interest.
Arm Yourself With Information
Knowing the facts and understanding your alternatives will help you protect yourself from making an impulsive decision.
- Be wary of big promises. Does a lender say you can be approved for a loan regardless of your credit history or rating? These too-good-to-be-true offers usually come with terms that can lead to more money troubles than you had originally.
- Do your research. If you’re considering a loan, check to see if the lender is licensed in your state. The Consumer Financial Protection Bureau has compiled a list of state regulator websites. Or, you can find contact information for your state’s attorney general on the National Association of Attorneys General website.
- Speak with an expert. An on-base financial representative or a Navy Federal financial counselor (available for free at 1-888-503-7106) can help you figure out your options and provide other financial advice.
- Find an alternative. You can sidestep the high cost of payday loans. Consider these possibilities:
Consider a small Personal or Shares Secured loan.
Think about applying for a Checking Line of Credit.
Explore a cash advance on a credit card (but know the interest rate and terms before you do).
Contact creditors as soon as possible if you won’t be able to make a payment and ask for more time. Many are willing to work with consumers they believe are acting in good faith.
Build an emergency fund. Even small deposits made regularly to a savings account can provide a buffer when you’re faced with an unplanned expense.
- Special Protections for Servicemembers. Payday loans (and other financing) offered to servicemembers and their dependents must include certain protections under the Military Lending Act. For example, for payday loans, the military annual percentage rate can’t be higher than 36 percent. Most fees and charges (with few exceptions) are included in the rate. Credit agreements that violate the protections are void.
You have options besides payday loans. Securing the money you need with a loan from Navy Federal may be a better fit. Contact us to learn more—we’re here to help.