Consumer Law

Get the Facts About Pay Day Loans

Payday loans can provide quick financial relief for individuals who don't have credit cards or savings to fall back on in an emergency. The lender electronically transfers a limited amount of money (often $500) to your bank account. In exchange, you give the lender a post-dated check or the authority to debit your account in a short period of time. A payday loan might seem like a great solution if you find yourself temporarily short of cash, but there are drawbacks.

Qualifying Is Usually Easy

It is easy to qualify for a payday loan, even if you have bad credit. Although some lenders will do more research into your finances than others, they typically ignore your credit report. They'll want to know what you earn and how you earn it. You'll have to substantiate this information with a paystub or other income proof. You must sign a contract, agreeing to repayment.

Terms Are Short

You don't make incremental payments on payday loans. Typically, the entire balance plus interest is due in a week or two. The lender will deposit your post-dated check or electronically debit your account on that date. If you arrive with a cash payment instead, the lender usually will void your check or nullify the debit agreement.

Fees Can Be High

Interest doesn't accrue day-by-day on payday loans. Interest is set in advance, usually as a percentage of the amount of money you're borrowing. Most states limit how high this percentage can be, usually between 10 and 20 percent. If you take a two-week $500 payday loan at a 15-percent fee, you must repay $575. This works out to a very high annual interest rate of nearly 400 percent. If you need a little more time to pay and have to ask for extension, the lender typically charges more. If you don't ask for an extension, but there's not enough in your account to cover the debit, penalties and bank fees will be added to what you already owe.

What Happens if You Can't Pay?

Payday loan agreements are legally enforceable contracts. These agreements typically include terms that allow the lender to take you to court if you can't repay the loan. If your lender gets a judgment against you in court, it can garnish your wages or your bank account. Some contracts provide that you must pay the legal fees for a lender who takes you to court. If you stop payment or try to block the electronic debit from your account, you could be liable for criminal charges, depending on your state's laws.

A Consumer Law Attorney Can Help

The law surrounding payday loans is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a consumer law attorney.

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