Pay Day Loan Scams

Check cashers, finance companies and others are making small, short-term, high-rate loans that go by a variety of names: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.

Usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow, plus a fee. The company gives the borrower the amount of the check minus the fee. Fees charged for payday loans are usually a percentage of the face value of the check, or a fee charged per amount borrowed - for instance, for every $50 or $100 loaned. And, if you extend or "roll-over" the loan - say for another two weeks after you're supposed to pay it back - you'll pay the fees for each extension.

Under the federal Truth in Lending Act, the cost of payday loans must be disclosed. Among other information, you must receive, in writing:

• The "finance charge" (a dollar amount)
• The annual percentage rate (" APR") (the cost of credit on a yearly basis)

A cash advance loan secured by a personal check - such as a payday loan - is very expensive credit. Let's say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash or you "roll-over" the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.

Alternatives to Payday Loans

When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest APR.

Consider a small loan from:

• Your credit union
• A small loan company
• An advance on pay from your employer
• Family or friends

A cash advance on a credit card may also be a possibility, but it may have a higher interest rate than your other sources of funds. Also, a local community-based organization may make small business loans to individuals.

Compare the APR and finance charges (including loan fees, interest and other types of credit costs) of credit offers for the lowest cost.

Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge or a higher interest rate.

Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases - even small daily items. Their costs add up.

Also, build some savings - even small deposits can help - to avoid borrowing for emergencies, unexpected expenses or other items. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies.

If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.

If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.

To Complain/For More Information

If you believe a lender has violated the Truth in Lending Act, file a complaint by calling the Federal Trade Commission Consumer Response Center toll-free at 1-877-FTC-HELP (382-4357)or filling out the Federal Trade Commission Consumer Complaint Form online.

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