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, and 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 these 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.
“Payday lenders tend to appeal to people who may be unable to obtain a credit card or bank loan, but they can lead borrowers into a dangerous debt cycle,” said Stephanie Garland, BBB Springfield Regional Director. “Consumers should understand the costs up front before borrowing.”
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high interest rates, as well as difficulty canceling a loan contract or obtaining a refund for automatic payments withdrawn in error.
A Springfield, Missouri woman told BBB in June 2019 that she erroneously made a duplicate payment on her loan. She said the lender told her it could not be reversed and advised her to skip her next payment. The woman told BBB the lender proceeded to call and text her every day about missed payments, even after her normal payments, and that her calls to the lender’s management went unanswered.
BBB recommends consumers follow these tips in order to be informed borrowers:
• Do your homework before borrowing. Check out the lender’s BBB Business Profile at bbb.org. The profile will show the company’s history of complaints and how they were handled, customer reviews, a letter rating from A+ to F and other information.
• 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.
• Limit the amount you borrow. Only borrow what you know you can pay off with your first paycheck. Most companies will allow you to “rollover” the balance for several weeks or months, but will tack on fees the whole time. This can result in you owing several times what you borrowed in the first place.
• Know your rights. Payday lenders are required to disclose certain information before initiating a loan. That information includes the cost, the interest rate to be paid and the specific fees that will be paid.
• Read the fine print. Pay close attention to fees and consequences of non-payment. Will the company allow you to make arrangements if you cannot pay?
• Keep your documentation. Many consumers said they started receiving calls from collections agencies years after they paid off a payday loan. Some of these calls were simple errors; others were attempts by scammers to collect a debt that is not owed. Protect yourself by having documentation that all loans were paid in full.
• Know where to turn. If you feel a lender has committed fraud or taken advantage of you, file a complaint with BBB and the FTC.