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Thursday, September 08, 2005

Need Cash? Beware of Pay Day Loans!

Have you seen the commercials? Cute characters promise financialprosperity. Happy, professional individuals appear to regularlyvisit their corner pay day loan shop as proudly as cashing acheck at the bank. Customers at the grocery store all recommendpay day loans as the easy solution for a lack of funds.
Could pay day loans be the answer consumers with low bankaccounts have been looking for? Is there any harm in using theseservices? Aren't they better than using credit cards or goinghungry?
WHY USE A PAY DAY LOAN?
Some individuals reason that paying a bill with borrowed money isbetter than receiving bad credit marks because of not paying thebill. This is understandable. However, some financialinstitutions are willing to make the occasional exception ifcontacted about the situation. Or there may be a small fee, butnot a credit report made.
Using it for groceries or other items? Consider the true costbefore making a decision. Compare the cost of using a pay day (orcash advance) loan to the fees charged for taking a cash advanceon your own credit card. Can family help? Often those who areforced to use pay day loans are not able to repay the loan by thenext pay check and that can lead to a cycle of debt and stress.
WHAT IS THE COST?
Several sources, including a consumer report by the FTC (FederalTrade Commission) and the CFA (Consumer Federation of America)state that usual the usual APR is between 350 - 650% with some ashigh as 780%.
A loan of $100 ranges in cost between $15 - $30. If the loan isnot repaid by the pay date then it can be renewed with anotherfee due at each renewal. A loan of $100 can cost $60 in feesafter 3 renewals.
WHO BENEFITS?
Based on the warnings issued by federal and consumerorganizations it is clear that using pay day loans or cashadvances from these businesses can often lead to more debt andproblems. Some sites were reported to automatically roll over theloan and only withdraw the renewal fee on the pay date. Othersites surveyed by the CFA required customers to agree in contractto not participate in class action suits or to file forbankruptcy.
For those who are having debt problems it is recommended to seek no- or low-cost credit counseling from a local non-profitorganization. These organizations can help with reducing currentinterest charges and lowering monthly payments. If the problem isbudget, you should look to a financial planner who can help youto manage the money you do have and avoid using credit at all.

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