BBB Warns Consumers To Be Aware of the Pit Falls of Payday Loans

A “payday loan” is a loan of short duration, usually two weeks, with fees of 15% to 30% of the amount advanced. The payday loan industry generates billions of dollars a year. States are cracking down on payday lenders, and the industry is regulated in the states where it is still legal. Payday loans are generally illegal in Georgia, unless made by a Georgia licensed industrial loan lender or an out-of-state FDIC insured bank as long as its agent in Georgia does not receive most of the profits. Loans made by a Georgia industrial loan licensee are subject to the terms and limitations of the Georgia Industrial Loan Act.

Payday lenders require you to furnish a copy of your driver’s license, and information about your employment and bank accounts. The loan is usually for a couple of weeks (the time until your next paycheck). The lenders do not perform a credit check, and you write them a post-dated check for the amount you want to borrow plus a fee. The fee is usually a “borrowing” fee and an account set-up fee. The lenders will then deposit your check after your payday if you have not already paid off the loan. If your bank account cannot cover the amount of the loan, you will then owe the original loan plus added interest. You may also incur overdraft fees from your bank. If you know you cannot pay off the loan in time, you can pay the borrowing fees (or finance charge) in order to renew the loan. The annual percentage rate (APR) for a payday loan often starts over 400 percent! This practice creates a cycle of consumer refinancing and continuous debt.

The federal Truth in Lending Act requires disclosure of the cost of credit. You must receive, in writing, the finance charge (a dollar amount) and the APR, which is the cost of credit on a yearly basis. Payday lenders are subject to this regulation.

The Georgia Industrial Loan Act of 1955 essentially made payday lending illegal by requiring state licensing and registration and by imposing strict usury limits on small loans. In 2004, the Georgia General Assembly increased the fines and criminal penalties for people making small loans at illegal rates of interest. The law went into effect in May 2004, and has survived challenges in federal court. Referred to as the Payday Lending Act of 2004, this law authorizes misdemeanor charges against violators, as well as fines of up to $5,000 per violation and a possible jail sentence of 1 year.

Usury laws limit the interest rate amount a lender can charge. In Georgia, a licensed lender cannot charge more than 10% interest on a loan of $3,000 or less. Most states have a usury limit; if you were to borrow money from an out-of-state lending institution, that state’s cap would apply. Bear in mind that these rates may differ from Georgia’s rates.

Alternatives to Payday Loans

Before you decide to take out a payday loan, consider some alternatives:

1. Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
2. Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs.
3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
4. Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
5. Make a realistic budget,including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.
6. Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you — both what it costs and what it covers. Some banks offer “bounce protection,” which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.

The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to next payday.

For companies you can trust please visit bbb.org.