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Alternative To Payday Loans

Payday loans, text message loans, telephone loans, online loans or short-term loans are different names for what is essentially the same product. Lenders hold the checks until the borrower's next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period. Some payday lenders also offer longer-term payday instalment loans and request authorization to electronically withdraw multiple payments from the borrower's bank account, typically due on each pay date. Payday loans range in size from $100 to $1,000, depending on state legal maximums. The average loan term is about two weeks. Loans typically cost 400% annual interest (APR) or more. The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Rates are higher in states that do not cap the maximum cost.

Debt consolidation is an option to help you repay a payday loan debt, even if you have bad credit. While bad credit debt consolidation loans have stricter approval requirements, they typically charge much lower interest rates and fees than payday lenders. They also tend to offer longer repayment terms, giving you more breathing room.

Payday lenders must not issue you more than one loan at the same time. They are also not allowed to rollover your loan. This means that they can't renew a loan at an additional cost to you or issue you a new loan to pay an old one.

What is the lesson? For one, policymakers cannot assume consumers are rational. Mr Fekrazad says Rhode Island could have paired its interest-rate cap with a cooling-off period, forcing borrowers to wait for a given period (ideally, longer than a pay cycle) before taking out another loan. The state could have also forced lenders to be more transparent. Research has shown that when lenders disclose more information about the future costs of their loans—in particular, how interest accumulates as debts are rolled over—customers tend to borrow less. Better-informed consumers make more rational decisions: that's an insight you can take straight to the bank.