Consumer website calculates cost of payday loans

by Center for Personal Finance editors

WASHINGTON (5/8/06)--A new consumer website exposes the trappings of high-cost, high-risk payday loans, and its online calculator shows you exactly what it costs to borrow money from a payday lender (Consumer Federation of America May 1).

Consumer Federation of America (CFA) launched paydayloaninfo.org last week in response to numerous reports over the past several years of excessive finance charges and fees associated with payday loans.

Sometimes referred to as cash advance loans, check advance loans, postdated check loans, or deferred deposit check loans, these short-term loans are small cash loans secured by the borrower's personal check, payable in full on the borrower's next payday. Interest rates in excess of 300% are not uncommon.

These loans strip limited resources from cash-strapped families, forcing many of them into a cycle of repeat borrowing.

According to CFA, a typical payday loan user carries eight loans a year from a single lender. If the fee is $15 per $100 borrowed for two weeks, you'd pay $360 in finance charges just to borrow $300 for sixteen weeks--and the APR is almost 400%.

The website contains information about how payday loans work, legal status of payday lending for each state, research reports, and how to file a complaint with state regulators.

The site offers useful tips on coping with cash-flow problems and finding less expensive money, including getting smaller loans from the credit union.

Its calculator clears up any question of how much it costs to borrow money from a payday lender. Plug in the loan fee (such as $15 per $100 borrowed), the amount of money you wish to borrow, the loan term--seven days or 14 days, and the number of loans or loan renewals you expect to have in a year from all lenders. You'll get the finance charge, total repayment amount, and annualized interest rate.

The Federal Trade Commission suggests the following alternatives to payday loans:

Shop around and compare offers. Consider a small loan from the credit union or small loan company, an advance on pay from your employer, or a loan from family or friends. Although a cash advance on a credit card has a higher interest rate than other sources, it's probably less than a payday loan.

Ask creditors for more time to pay your bills. Ask if you'll be assessed a late charge, additional finances charges, or a higher interest rate.

Make a realistic budget and stick to it. Avoid unnecessary purchases and build savings to avoid borrowing for emergencies.

Ask about overdraft protection on your share draft/checking account.

Work out a debt repayment plan with creditors. Contact the local consumer credit counseling service for help with negotiations (800-388-2227). Check with the credit union, your employer, or local housing authority for no- or low-cost credit counseling programs.

If you decide you must take out a payday loan, only borrow as much as you can afford to pay in full with your next paycheck and still have enough resources to make it to the next payday.