When cash runs short and bills are looming, some consumers look to payday loans, but they need to understand the risks before borrowing. If not approached with caution, these loans can snowball into a significant debt obligation of their own, with high interest rates and high-pressure collection tactics.
Payday loans, as the name suggests, involve borrowing money against your next paycheck. Borrowers write a check for the amount they wish to borrow, plus any finance charges, and receive cash. The average loan term is about two weeks, but loans can be renewed: Consumer Financial Protection Bureau research has found that 80% of such loans are rolled over or reborrowed within 30 days.
The expenses associated with payday loans can be exorbitant; a common finance charge is $15 or $30 per $100 borrowed, and annual interest rates can balloon into the hundreds. These high interest rates can force borrowers to renew the loan and pay new fees every two weeks until they can finally save enough to pay off the principal and get out of debt.
Nationally, BBB received more than 1,000 complaints about payday lenders in 2018. Many complaints revolved around the loans’ high interest rates, as well as difficulty canceling a loan contract or obtaining a refund for automatic payments withdrawn in error.
Do your homework before borrowing, and check out the lender’s BBB Business Profile at bbb.org. Never pay an upfront fee; some short-term loan providers will ask for a post-dated check to cover the amount you borrowed plus interest and fees. However, if any lender asks for those fees in cash before giving you any money, walk away — especially if it’s an online lender asking for money via wire transfer. Charging undisclosed upfront fees is illegal, and cash sent by wire cannot be traced.
