The Payday Loan Trap

Short on cash? Or need a bit more money to make it through to payday? You can find the $100 or $200 you need to get by until your next paycheck arrives with a payday loan.

But beware. If it sounds too good to be true, it probably is. At most check-cashing outlets, you can expect to pay interest rates that start at a whopping 250% APR (annual percentage rate)!

Here's how it works. Typically, a customer writes a postdated personal check to a check casher for the amount he or she wishes to borrow Ð plus a fee for the service.

The customer gets the cash and the check casher takes the fee amount. Both understand that funds are not available at the time to clear the check. The check casher holds the check until the customer's next payday, at which time the customer can:

• Redeem the check with cash or a money order, or
• Allow the check to be deposited, or
• Renew - or roll over - the loan by paying an additional fee

The way fees for this service are usually assessed are per each $100 borrowed. For example, if the fee is $20 per $100, a customer needing $100 would write a postdated check to the check casher for $120.

The real surprise comes when the fees are converted to an Annual Percentage Rate (APR) - which all lenders are required to do by law under the Truth In Lending Act. APRs can skyrocket to as much as 1500% APR!

Compare that with the 22% APR many credit cards charge for a cash advance - or even the 36% APR some small loan companies charge.

The fees climb even higher if a customer must renew, or roll over, the payday loan. Before long, the escalating charges dwarf the original balance. It's a lot to pay when you're borrowing such a little bit of money.

What should you do if you need cash before payday rolls around?

Contact your credit union. We have many solutions -from financial counseling to provident and productive credit options - to help you avoid falling into the payday loan trap.