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Saving Money and Loans

Conventional wisdom about payday loans and cash advances would lead most savvy consumers to argue that payday loans are costly money. This may hold true if consumers buy a payday loan to buy new clothes, but is certainly not the case when you are in need of paying bills that have come at a bad time. A payday loan may prove to be the best financial move you can make.

Consider the case of Randy. Randy was hit with an unexpected car repair. He needed to fix his car, or he wouldn’t be able to get to work and provide for his family. Randy generally makes good financial decisions, but he knew that he wouldn’t have enough money to pay his bill when they came the next week. He tried to find ways to pay his bills, but he was low on options. He found a reputable payday loan company that would give him a cash advance until his next payday that he could use to pay his bills and keep his credit strong.

Two weeks later, his paycheck was automatically deducted the amount he had borrowed plus a reasonable fee and he had found a way to keep his creditors happy and keep his anxiety down. He was taken care of with a payday loan, and this cash advance let him carry on with his life without getting into a cycle of debt.

What about the alternative?

What would happen if Randy didn’t get the payday loan? The alternatives are actually quite alarming. If Randy had four credit cards, a cable bill, a phone bill and a power bill that he needed to pay, but couldn’t, what would happen? He could pay the credit cards a month late with a $26.00 fee on each card. His cable company charges $48.00 for a bounced check. The power company charges a fee of $50.00 for reconnecting the power after it has been shut off. Randy’s phone company charges $30.00 for late payment, but is he can’t pay in a week, they also charge a $25.00 reconnection fee. The total cost for Randy not paying his bills is a whopping $257.00! He would have only needed $300.00 to pay all of his bills on time!

These fees are on top of what he would have to pay. So instead of getting a payday loan and paying his bills on time, he now owes $557.00. Randy didn’t have enough money to pay his bills before, but with all the fees, he is really in debt!

Luckily, Randy got a payday loan and saved over $210.00 in late fees and reconnection charges. Another benefit of Randy’s payday loan is that his credit is still strong. His credit report would have had marks against him and made it hard for him to get a car loan or restrict him from getting a job.

Payday loans are a great alternative to the costly fees of the big utilities and credit card companies. Save yourself from these fees and debt that just grows and grows. When you need money quick, get a payday loan!

The Law of Payday Loans

The number of payday lenders has exploded in recent years. Since 1990, the number of payday loan outlets in Colorado alone has risen from about 12 to nearly 200. This growth has several causes. Many larger lending institutions no longer issue small loans because the returns are lower, while the costs of originating and servicing the loan are basically same. “The national finance companies, which were initially founded to meet precisely this credit need, have moved out of this type of small lending.” This created a vacuum in this particular market segment. There has also been a move to deregulate interest rates. This move started after Congress passed several laws that pre-empted state laws that placed interest rate caps on certain types of mortgages. This caused many states to deregulate interest rates in an effort to keep lending businesses from moving out of state. With this vacuum in the small amount, short term credit market and a deregulation of interest rates, an explosion of payday loan lenders has resulted.

Unfortunately, with this explosion, and deregulation, has come an increase in the number of unscrupulous lenders who take unfair advantage of consumers. These lenders do not reveal the true costs of payday loans and encourage consumers to take out multiple loans, forcing them into a cycle of debt out of which most consumers cannot climb. The actions of these lenders have led to a call for reform of the laws governing payday loans.

There are three general categories of payday loan regulation in the various states. The first category makes payday lenders subject to the state’s small loan or usury laws. These laws set interest rate caps of up to 36% per year and also contain provisions for loan amounts length of the loan, various reporting regulations, and required and prohibited contract provisions. In effect, these laws eliminate payday lending as it is no longer profitable at these interest rates. The second category allows payday lenders to charge any interest rates or fees which the parties to the loan will agree to pay. The third category of laws specifically permits payday loan lending. These laws usually require licensing or registration and may require a bond or certain level of assets. These laws also specify minimums and maximums for the loan term and amount. Fees and interest rates are usually also capped, but at a higher rate than in the first category. For example, on a maximum loan of $300, North Carolina permits a charge of 15%, or $45.

The state of Illinois recently enacted its Payday Loan Reform Act, which will go into effect on December 8, 2005. Previously, Illinois was a category two state and this act moves the state into category three. The act contains several provisions designed to limit abuses by payday lenders. The act limits fees to $15.50 per $100 loan over the term of the loan. Payday loans now must be for a period of 13 days or more. A lender cannot make a loan to a consumer if that loan would result in the consumer being in debt to a payday lender for more than 45 consecutive days. “After a consumer pays off the balance of all payday loans he or she took out in a 45 consecutive day period, a lender must wait seven calendar days before issuing that consumer a new payday loan.” A lender is not allowed to give a loan to a consumer who already has outstanding balances on two loans. The maximum amount of a loan is limited to the lesser of $1000 or 25% of the consumer’s monthly income. There are also special provisions that only apply to members of the military.

These reforms are designed to prevent payday loans from becoming a long term burden, while still recognizing that there is a need for short term, small sum lending. This is a better proposition than simply banning payday lending. Without a legal source for this type of loan, consumers might turn to loans from less safe alternatives – loan sharks.

Sources:
http://www.consumerlaw.org/initiatives/payday_loans/pay_menu.shtml
http://www.ag.state.il.us/consumers/payday_loan_reform_act.pdf

Payday Loans and Budgets

While payday loans can be used to meet your immediate cash needs, they are expensive. At $20-$30 per $100 loaned, the fees can add up quickly, especially if you have to roll over the loan once it reaches its due date. Since the amounts loaned are so small ($500 maximum), you can avoid the need for a payday loan with a little bit of budgeting in order to build up some savings.

The first step is to determine how much income you receive per month after taxes. Include all sources: your job, alimony, investment income, interest. Basically, include anything that is regular. A one time windfall can be a boost to your savings, but it isn’t much help when planning a budget.

The next step is to determine your monthly expenses. Again, include everything: rent/mortgage, food, gas, car payments, insurance, contributions to your investments, donations to charity, and any other regular expenses. Don’t include one time expenses here either. While they can have a significant impact on your finances, one time expenses should come out of your disposable income.

Now that you have monthly income and expenses, subtract your expenses from your income. If you get a negative number, you’ve got a problem. You are spending more than you make. Find ways to reduce your expenses. Cut back on trips to Starbucks. Give less to charity. Buy cheaper clothes. Do whatever it takes to get your expenses in line with your income. If you get a positive number, you’re good to go. This amount is your disposable income. However, if it’s just barely positive, you might still want to reduce your expenses a bit to give yourself a bit more of a cushion.

Let’s take an example. Suppose your income is $3000 per month, and your expenses are $2700. So you’ve got $300 per month in disposable income. Many people would be tempted to spend this money on things like going to the movies or nice dinners out. You can still do that, but you should put some of it away in a savings account if you want to avoid a payday loan. Let’s say you put half of that money ($150) away. That money will form your rainy day fund and if you never need to use it, it can go towards your retirement. After 4 months, you will have $600 in this account – more than the maximum payday loan you can get. After a year, you will have $1800. If you increase your savings as your income increases rather than increasing your expenses, this fund will grow even faster and you will be able to handle bigger emergencies without having to resort to a payday loan.

It’s not difficult to come up with a budget that will let you avoid payday loans – it only takes a little bit of arithmetic. The hard part is resolving to actually make a budget and then stick to it.

Credit Reports

You may know that different businesses from cell phones to home mortgages base a large part of their decision for giving you their services is based on your credit score. This score is a number between 300 and 850 and is often referred to your FICO credit score. FICO is short for Fair Isaac Company. This company got together with the three credit reporting agencies, Experian, Equifax and Trans Union, in the early 1980s and created a generic and uniform credit reporting score. Each company uses slightly different factors to give you your score, but a 720 from Equifax is equivalent to the same score from Trans Union.

The credit agencies look at your current loans, other debts and financial obligations, and create a credit profile of you. They then take this profile and compare it to other people in similar situations and give you a rank based on those peoples’ past credit performance and how likely they were to repay their debts. Your score is the supposed to represent how likely you are to repay your debts.

Companies will have their own method for using credit scored to issue you credit or services. A normal evaluation would be that a person with a score of 650 and above has good credit and the process for getting more credit will be fast and easy. At the 620-650 range, consumers have average credit scores. They may need to show additional information like where their income comes from or talk with the creditor so that they may asses the person more carefully. The terms may not be as favorable as someone with a higher credit score. People in the low category, 620 and below, can normally still get credit, but the finance charges will be higher and with more restrictions.

You are legally entitled to have free access to your credit report from each of the three companies once a year. There is a website that is a joint venture from all three companies at www.annualcreditreport.com. This site lets you view all the information in your reports and can help you resolve any inconsistencies in the report. Many people have been denied credit based on a low FICO score, only to find out that an old credit card still has a small balance and was never fully paid back.

There have also been reports of video stores leaving bad information because of rentals that were never returned. In that case, the consumer had to pay all the late fees to have the bad mark removed. First, a company must have your social security number to get a credit report, and most video rental locations do not go this far. This does, however, make a point to show that there may be long-term consequences for misusing your credit.

This also makes the point that it is fairly simple for a company to put a blemish on your credit report. If there is incorrect information reported against you, you have the right to remove it. First you should keep in mind that the problem can often be easily cleared up with only a few phone calls. You should keep in mind that it may be more difficult than this and may result in having to make your case in front of a judge in court. Keep track of everyone you contact and what was said. Keep in mind that if you have to argue your case in court, all of your detailed information about how you tried to fix the problem will be invaluable.

Don’t forget, your credit score is your reputation. In the past people would be issued credit because they knew the person and could estimate their credit worthiness. Today the economy is global and requires a universal system whereby someone who has never met you can gauge your credit worthiness. Your credit report and credit score is your reputation and it is your right and responsibility to fix your reputation if it gets tarnished.

Protect Yourself

When looking for a good company to buy a payday loan or deferred deposit advance, you should keep a few things in mind as you compare different companies. First of all, the lenders that are offering these loans are doing so at sub prime levels. This means that they offer loans to people who may not have the best credit and are at risk for defaulting on their loan. This also means that they pass their risk into the cost of such loans.

If you find a lender that offers low priced payday loans, that lender will normally have a higher requirement for potential applicants and thus, has less risk, and passes those savings onto the customer. This means you should apply to a variety of low priced loans, since you are less likely to be accepted by them. Other lenders may not specify fees because they search through a list of lenders to find the best lender at the best price, and then return the results.

Payday loans are typically given with a higher APR than conventional loans for a few reasons. As mentioned before, the people to which they are offering loans are generally a higher risk population than people to which larger loans like mortgages are offered. Payday loan lenders rarely look at the total indebtedness of potential clients and may only want proof of employment and a checking account. These things make it much easier to get a payday loan, and if you are not careful, it makes it much easier to find yourself further in debt.

Payday lenders often also use third-party lenders to service their loans. This means that when you give a lender your personal information, they might forward this information to various companies who will check you eligibility for a loan and relay this information back to the company to which you gave your information. This is especially true on the internet. The important thing to look for is that the site you are dealing with has a secure connection and that the connection remains secure as you go through the loan process. You can verify this in internet explorer by looking in the lower right corner to see if there is a small icon of a lock. This indicated a secure connection. Also, look for a site that you feel you can trust. Your own judgment is the best indicator of a reputable company.

There are also several laws in place to keep you safe when using payday loans. The Fair Credit Reporting Act stated that a lender must tell you why you have been denied credit if they use a consumer reporting agency. The Equal Opportunity Act mandated that payday loan lenders can not discriminate against applicants. The biggest safe guard is the Federal Trade Commission act which declares that unfair or deceptive trade practices are illegal. If you feel you’re rights have been violated, take action.

First and foremost, do not use a company again if you feel they have mistreated you in the past. There are enough payday loan lenders in the market to give any consumer plenty of choice. Try a search engine query for exactly what you are looking for, “payday loan.” Furthermore, you can contact the FTC.gov website to report any unlawful practices. You should also file a report with the Better Business Bureau.

The best defense you have against a bad payday loan experience is to keep yourself well informed. Ask questions and make sure you are comfortable with the transaction before you have committed yourself. There are a lot of really good lenders in the market. Search until you find one that you can feel secure with and that offers top notch service.

References:
http://www.fdic.gov/news/news/financial/2005/fil1405a.html
http://www.usa.gov/

Consumer Questions

Q: What is a payday loan?
A: A payday loan is a short term loan extended until your next payday. After you have been approved, the money is electronically deposited into your account over night. When the loan comes due, the repayment is made via an authorized automatic withdrawal.

Q: What are the requirements for a payday loan?
A: The qualifications for a payday loan are easy to meet. There are no credit checks. You just need to meet the following requirements:

•Currently have a job or other source of regular income.
•Make at least $1000 per month.
•Be a US citizen and at least 18 years of age.
•Have an active bank account

Q: I have bad credit. Can I still get a payday loan?
A: Yes you can. Payday lenders usually do not obtain credit bureau reports as part of the approval process so your credit problems will not adversely affect your application.

Q: Do I need collateral?
A: No. Your job and your paycheck serve as your collateral.

Q: How long does the process take?
A: It is very quick. Typically, you will receive an approval decision within a few minutes after submitting your application. The money will be deposited on the next business day, so it could be as soon as tomorrow.

Q: Are there any application fees?
A: No. There are no application fees.

Q: Can I get more than one loan?
A: You can only get one loan at a time. You can apply for another loan at a later date. However, you should keep in mind that payday loans are not intended to support a long term budget problem. Repeated use and reliance on payday loans can cause serious financial problems.

Q: When do I have to repay the loan?
A: Payday loans are generally due on your next payday. The standard repayment time is usually no less than 7 days and no more than 18 days. Your loan agreement will specify when your loan is due. You can always pay off the loan early.

Q: What if I cannot repay the loan when it is due?
A: There are several options for repayment:

•Pay the loan in full on the due date listed in the loan agreement.
•Pay the finance fee and a portion of the loan amount.
•Pay only the finance fee on the due date.

Your loan representative will be able to detail the options available to you.