Released Feb. 15, 2008
Richland Center, Wis.--A payday loan might be a source of quick cash, but you’ll be paying it back with interest--sometimes up to 500 percent, according to Peggy Olive, University of Wisconsin-Extension family living educator in Richland County.
"In Wisconsin, there are no laws that limit the interest rate a lender can charge, so payday loans might charge a 500 percent annual percentage rate (APR) or more," says Olive. "For a person borrowing $200 for 2 weeks, a 500 percent APR equals $38.36 in fees. Compare that to a loan at 36% APR where the fees would be $2.76, or a 12% APR with fees of $0.92."
Payday loans are high-interest cash loans for people without access to other sources of cash or credit. Borrowers must be employed and have a checking account to qualify. Payday loans are also called check loans, postdated check loans or payroll advance loans.
To take out a payday loan, you fill out an application and provide a paycheck stub and photo ID, sign the loan agreement, write out a postdated check to the lender and get cash back minus the fees for the loan.
If the money isn’t in your checking account when the loan comes due, you can refinance the loan for additional fees by writing another postdated check.
If you fail to make the payment, the lender can seek a money judgment for the amount of the loan, court costs and fees, and even seek to garnish your wages.
Other types of instant cash loans also carry high interest rates. A Refund Anticipation Loan (RAL) comes from a tax preparer who completes your tax return. RALs are usually for the amount of your anticipated tax refund, minus the interest and fees which can range from 70 percent to 500 percent APR. You can save tens or hundreds of dollars by skipping a RAL and having your tax refund direct deposited into your bank account, usually within 10 days.
A car title loan--also called a motor vehicle equity line of credit--is a source of cash for borrowers willing to put their vehicle up as collateral. Car title loans are usually set up for 30 days with interest rates of 290 percent or more. Unlike payday loans, borrowers don't need proof of employment or a checking account, but they do need to own their vehicles free and clear. After turning the car title and a set of keys over to the lender, the borrower receives cash and maintains use of the vehicle.
If the loan is not paid back or rolled over with extra fees by the due date, the car will be repossessed. The amount of the title loan is based on how much the vehicle is worth, but typically does not exceed 33 percent of the car's value. That means a borrower who misses one payment on a $350 loan could lose a car worth $1000.
"For individuals experiencing a financial emergency and in need of quick cash, there may be other options to consider before taking out a payday loan," says Olive. "If you have a credit card, consider a cash advance on your card. The fees and annual APR for a cash advance are likely to be less than 100 percent--still extremely high, but not as high as a payday loan."
If you have a good track record and haven't missed any payments with other creditors, see if you could skip or delay one month's payment. Compare the late fees and interest charges that you might run up by skipping a payment with the payday loan fees and see which is the better option. Try to send in any missed payments before 30 days to avoid lowering your credit score.
Other options to consider might be a loan from a family member or charitable assistance from your church. Perhaps you have time to sell some personal items at a rummage sale to come up the needed cash.
For more information on consumer credit loans, contact your local county UW-Extension office or visit the State of Wisconsin Department of Financial Institutions website at http://www.wdfi.org
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http://www.uwex.edu/news/2008/02/consider-alternatives-to-a-payday-loan
Contact: Peggy Olive, (608) 647-6148, peggy.olive@ces.uwex.edu
