A "payday" loan may look like a credit option when you're short on cash today, but your next paycheck isn't due for another week or more. Names you'll see for these loans include cash advance or check advance loans, deferred deposit check loans or post-dated check loans. Before using these loan services, know how they work, the disclosures you must be given and what the true loan cost is.

Payday Loans, Providers and Terms

You may see television, internet or print ads for "payday loans." These loans are offered as an easy source of needed cash until your next payday. What may not be clear is these loans are short-term and carry high interest rates. The Federal Trade Commission offers resources for consumers to learn about and avoid bad loans.

Who provides payday loans? Finance companies, check-cashing companies and other businesses.

The typical process for a payday loan involves you writing a check, made out to the lender for the amount you're borrowing, plus fees. You're given the net amount. The fees may be based on a percentage of the loan amount, or charged in increments, for example a set amount for each $50 or $100 loaned. Borrowers can often choose to extend or "roll-over" the loan period, with fees charged for each extended loan term.

Required Disclosures

A federal law, the Truth in Lending Act, requires certain loan information be given to borrowers before the loan is made. Information you must receive from a payday loan provider includes:

• The dollar amount of the finance charge (what the loan costs you)
• The APR, or annual percentage rate; this is the cost of the credit to you, stated in a percentage on a yearly basis
• The disclosure terms must be given to you, in writing, before you sign and accept the loan

Get the big picture of what a payday loan really costs. Let's say you borrow $100, with payment due in two weeks. The lender takes your personal check for $115, and holds it until your next payday, or rolls it over into the next loan period. You receive $100, the lender keeps $15, which equals an APR of almost 400 percent. If you extend the loan term with three more two-week periods, you'll pay $160 for that $100 loan.

The law and US Department of Defense rules do give certain protections to borrowers serving in the military. Measures include a maximum APR of 36 percent, and added disclosures. If lenders don't follow rules for military borrowers, the loan contract may be void.

Payday Loan Alternatives

Avoiding the need for a payday loan is your best plan. If you've used these loans in the past, get away from the practice. Budget realistically, and save for extra expenses so they won't strain your finances, leaving you vulnerable to payday lenders. Check out overdraft protection plans for your checking account, which could save you fees for bounced checks, and help keep your account in the black.

Strategies and alternatives to loans include:

• Contact your lenders or creditors if you know you'll have trouble paying a bill. Often you can work out alternate payment plans, and late fees or added charges are still cheaper than payday loans. Seeking similar help from a consumer credit counseling service is an option. Many are non-profit and can provide counseling and help with negotiating with lenders
• Shop for a low-cost loan or a credit card cash advance. Lending sources for personal loans include credit unions and smaller loan or finance companies. Credit card cash advances can cost more, but you may be able to tap a promotional offer and interest rate. Compare all terms and borrow only what you truly need

Questions for Your Attorney

• I owe a payday loan provider a lot of money. I think the loan terms weren't legal, and I ended up with a big balance. Does the law allow me to sue the lender?
• How easy is it for a payday loan lender to garnish my wages for payment on my loans?
• Can a payday loan lender sue me in small claims court to recover a relatively small loan account balance?
• Could I get rid of payday loan balances by filing for bankruptcy?

Related Resources on Lawyers.com^sm

- Contact a Consumer Law Lawyer in your area for specific legal advice, and read about Selecting a Lawyer
- Need a form? Access hundreds of Personal Legal Forms, including this Complaint Letter to a Company
- Read Customer Complaint Scams and Credit Card Lender Standards or access more Consumer Law articles and information
- Legal Dictionary
- Visit the Legal Forums for discussions on Consumer Law topics