Frequently Asked Questions:
- How much do payday loans cost?
- What are the Risks Associated with Payday Lending?
- What is an APR?
- If I can’t pay the lender what I owe what happens to me?
- How Debt Management Plans and Debt Settlement Programs work?
- What should I do before I get a payday loan or an advance loan?
- How can you solve your debt problems on your own?
- How can you correct errors on your credit report?
- What can I do to improve my credit score?
- What are my debt relief options?
- How should I choose a Credit Counseling Organization?
- What’s the best way of shopping for a loan?
Even if the duration of the loan is only week or two until you get your next paycheck, a payday loan or advance loan can cost you an arm and a leg.
- You borrow $500 and you’re charged a fee of $75.
- The lender asks you to issue a check (usually post-dated) for $575.
- The lender keeps your check and gives you $500 in cash.
- When the two weeks are over, you give the lender $575 in cash to cover the amount on the check and you get your check back.
- The truth: You paid $75 to borrow $500 for two weeks. For that single two-week period it’s only 15%. But if youimmediately made the same loan arrangement that interest rate would be effectively doubled to 30%.
Payday lending can be a growth opportunity for banks. Payday loans are priced higher and, therefore, promise higher revenues and wider margins. These profits, however, also have greater risks associated with it.
Payday loans only require proof of a documented regular income source, a personal checking account, and valid personal identification to qualify for a payday loan. This is intentionally so because the market for payday loans are those that cannot secure credit elsewhere. In other words, these are people with less than desirable credit histories. The chances that borrowers will default on a loan are, therefore, higher. Payday loans are an example of subprime lending.
As a consequence, the recorded net charge-off ratio of lenders can be as high as 83%, far higher than other subprime instruments such as credit cards, which have ratios that typically do not exceed 20%. Charge-offs are declarations by lenders of bad debts — amounts that are unlikely to be collected. The net charge-off ratio is the proportion of these bad debts to total loans. Payday loan portfolios will need higher loan loss reserves and capital levels than other forms of subprime lending.
Banks and other depository institutions may also have arrangements with third parties to offer payday loans. This is fraught with risks because of the possibility that third parties may add on fees and charges in excess of what is allowed under state laws. Although banking laws do allow interest rates of depository institutions to be exported across state borders, there has been an increase in the number of lawsuits alleging violations by third parties of various state and federal consumer protection laws. These arrangements may expose banks to legal problems and the risk to their reputation, as well as as transaction errors and fraud.
The annual percentage rate, or APR, is your effective interest rate if that two-week loan when viewed from a yearly perspective. Computation of the APR is based on:
- how much money you borrow
- what you’re being charged monthly (the interest)
- the length of time before the loan is due for repayment
If you can't pay the lender according to the conditions you agreed on, you automatically enter into the same agreement for two more weeks. This is called a "rollover", or "rolling over" the loan. When you do this you’ll need to pay another fee, usually the same amount as the original fee. If you roll over the loan a few times, you'll discover that you've paid a lot to borrow a small amount of money. It becomes almost impossible to get back to where you started when you first made the loan.
Debt Management Plans (DMP)
A debt management plan is an agreement between you and your creditor, arranged by a credit counseling organization on your behalf. The credit counselor works with you to arrive at an amount that you can afford to set aside each month to pay off all your unsecured debts such as credit card bills, student loans and medical bills. Based on this amount, your counselor will then help you negotiate with each of your creditors to come up with a payment schedule. A DMP requires you to make regular timely payments, usually for a period of 48 months, usually at a lower interest rate or with certain fees waived. It’s good practice to always check with your creditor all the concessions described by your credit counselor. Most DMPs also stipulate that you do not apply for new credit, or use additional credit while you’re still on the plan.
Debt Settlement Programs
Debt settlement programs are typically offered by companies negotiating with your creditors to allow you to pay a "settlement"? to resolve your debt. This usually comes in the form of a lump sum that is less than the full amount that you owe. In order to accumulate that necessary lump sum, the program required that you set aside a specific amount every month in savings. Debt settlement companies usually require that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off any settlement that is eventually reached.
Consider these risks before enrolling in a debt settlement program:
- These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. You need to make sure you are capable of meeting this condition so that you don’t drop out of the program and up settling just a small part of your debt, or none at all.
- Your creditors are under no obligation to cooperate with debt settlement companies so your debt might not be settled at all. Some of these debt companies start with smaller debts first, leaving larger ones to accumulate interest.
- Debt settlement programs often ask you to stop sending payments directly to creditors. This can have a negative impact on your credit report. Other consequences include accrual of late fees and penalties that can further worsen your situation. You could even be sued.
Before you even seriously consider a payday loan, think of other ways to borrow money:
- Will I qualify for a loan from a bank or credit union?
- If I want to use money from payday loans to pay my bills, can I get more time (an extension) from my creditors?
- Can I use my savings instead?
- Do I have family or friends that can lend me the money?
- Can I charge the amount to my credit card instead?
Develop a budget
Assess how much you make and how much you spend by writing all income and expenses down. Take note of fixed expenses – those that are the same monthly such as mortgage, rent, and insurance premiums. Also list down variable expenses such as groceries and clothing. Writing down all your expenses helps you to track your spending patterns and prioritize. The goal is to make sure you can make ends meet.
Contact your creditors
If you’re having trouble making ends meet, make sure to inform your creditors ASAP. Make sure they understand why it’s difficult for you to meet monthly payments, and try to hammer out an adjusted payment plan that reduces your payments to a level that’s more manageable. Don’t wait for your creditor to give up on and send a debt collector to come running after you.
Deal with debt collectors
In the event that you do have to deal with debt collectors, make sure you’re aware of federal law that governs their behavior. They may not harass you, lie, or use unfair practices when they try to collect a debt. Most importantly, be aware that they’re bound by law to honor a written request from you to stop further contact.
Manage your auto and home loans
Debts can either be secured or unsecured. Secured debts are tied to an asset, like your car or your house. Failure to pay debts on time gives lenders the right to repossess your car or foreclose on your house.
Most automobile financing agreements allow a creditor to repossess your car when you default on your monthly payments. If you’re in danger of defaulting, consider selling the car and paying off the debt to avoid the added costs of repossession and a negative entry on your credit report.
To avoid foreclosure, contact your lender immediately If you’re falling behind on your mortgage, and provide them an explanation. Most lenders are willing to work with you if they believe you’re acting in good faith and the situation is temporary. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. If you and your lender can’t agreen on a plan, seek help from a housing counseling agency. Many of these agencies provide free assistance to homeowners who are having trouble making mortgage payments.
Under the FCRA, both the credit reporting company and the information provider are responsible for correcting inaccurate or incomplete information in your report. To get the full benefits of all your rights under this law, contact both the credit reporting company and the information provider.
Tell the credit reporting company, in writing, what parts of the report you think is inaccurate and attach copies of documents supporting your position. Your letter should clearly identify each item you contest. State the facts and explain why you dispute the information, and make the subsequent request that it be stricken from the record or corrected. Keep copies of your dispute letter and enclosures.
Credit reporting companies must investigate the items in question, usually within 30 days, and forward data from you to the information provider, which must then investigate, review the information you provided, and report the results back to the credit reporting company. The information provider, when it ascertains that the disputed information they provided was inaccurate, must notify all three nationwide credit reporting companies so corrections can be made to your file. You will then be provided complete results of the investigation, which must include the name, address, and phone number of the information provider. You can ask the credit reporting company to send notices of any corrections to anyone who received your report in the past six months. You can also have a corrected copy of your report sent to anyone who received a copy during the past two years for employment purposes. You can also ask the dispute to be included in your file and future reports.
Make the dispute official, in writing. Many providers specify an address for disputes. The report of the provider to the credit reporting company must include a notice of your dispute. And if you are correct (that is, if the information in your report is found to be inaccurate) the information provider may not report it again.
Credit scoring systems are complex and vary from one creditor to the next. Improving your credit score depends on how a change in one factor affects other factors considered by the system. Scoring models usually take into account the following pieces of information in your credit report to help compute your credit score:
- Do you pay bills on time? Payment history is a key factor. Your score is likely to be lower if your credit report indicates that you’ve been late in paying bills, had an account turned over to a collection agency, or have previously declared bankruptcy.
- Is your credit limit you maxed out? Many scoring systems look at the amount of debt you have and compare this to your credit limits. The amount currently owes should not be close to your credit limit, otherwise it’s likely to affect your score negatively.
- How long have you had credit? Scoring systems consider the length of your credit track record. However, timely payments and low balances can offset the negative effects of an insufficient credit history to your credit score.
- Do you have recent applications for new credit? Many scoring systems consider whether you have applied for credit recently by looking at "inquiries"? on your credit report. Too many recent new account applications could have a negative effect on your score.
- How many credit accounts do you have and what kinds of accounts are they? Although it is generally considered good to have established credit accounts, too many may have a negative effect on your score.Some types of credit, such as loans from finance companies, may also have a negative effect on your credit score.
Scoring models may be based on more than the information in your credit report. Mortgage applications, for example, involves consideration of your down payment, total debt, and income, among other things.
Improving your score significantly is a time-consuming process, but it’s doable. To improve your credit scores focus on paying your bills on time, pay down outstanding balances gradually, and stay away from new debt to until your debt situation improves.
Working with a credit counseling organization is just one option for dealing with your debt. You could also negotiate directly with your credit card company, choose to hire with a debt settlement company, or make the hard decision to file for bankruptcy.
Talk with your credit card company instead of hiring a company to do it on your behalf. Be persistent, even if you’ve been turned down before, but always remain polite. You’ll need to keep good records of your debts, so you can work out a modified payment plan that reduces your payments to a level you can manage. Creditors are often willing to negotiate with you even after they write your debt off as a loss.
Bankruptcy. Credit counselors and other experts say that in some cases, declaring bankruptcy may make the most sense. Chapter 13 bankruptcy allows people with a steady income to hold on to their property, like a mortgaged house or a car, that could otherwise be lost through the Chapter 7 bankruptcy process. In Chapter 13, the court may approve a repayment plan allowing you to pay off your debts over three to five years without having to surrender any property. You’ll need to hire a lawyer and get credit counseling from a government-approved organization. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a "means test" that requires you to confirm that your income does not exceed a certain amount, which varies by state and is published by the U.S. Trustee Program. Find more information in United States Courts.
Debt settlement. Debt settlement programs are typically offered by companies negotiating with your creditors to allow you to pay a "settlement"? to resolve your debt. That amount is usually a lump sum payment that the program asks that you set aside every month into an escrow-like account to accumulate enough savings to pay off any settlement that is eventually reached. Often, you will be instructed to stop negotiating with or making payments directly to your creditor. Although a debt settlement company may be able to settle one or more of your debts, these programs involve substantial risks serious negative financial consequences. Some debt settlement companies deceive consumers by making promises they do not keep or are incapable of delivering on and may engage in illegal conduct (like charging fees before obtaining any settlements).
Reputable credit counseling organizations can advise you on managing your money and debts, Trained and certified counselors will discuss with you your consumer credit, money and debt management, and budgeting concerns. They can help you develop a personalized plan to deal with your money problems. Credit counseling agencies should send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn’t do that, consider going elsewhere.
Always check out credit counseling agencies with your state Attorney General and local consumer protection agency. They will have files on complaints about the agency. The United States Trustee Program also keeps a list of credit counseling agencies approved to provide pre-bankruptcy counseling.
Here are some questions to ask to during your first session:
- What range of services do you offer? Look for an organization that offers a diversified array of services that includes budget counseling, and classes for savings and debt management. Avoid organizations that push a debt management plan (DMP) as your only option.
- Do you provide free information? Avoid organizations that charge for educational materials and other information.
- What fees are involved? Set-up and/or monthly fees, for example, and other similar charges. Get a specific and written price quote. If you can’t afford the fees and the organization refuses to help further, it’s your signal to walk away.
- Will I have a formal written agreement or contract with you? Read the fine print and don’t sign anything until you’ve read the document thoroughly.
- Do you have a license to operate in my state?
- What are the qualifications of your counselors? Check for training and certification. Make sure they’re not trained by an organization affiliated with the agency.
- What assurance do I have that personal and sensitive information will be kept confidential and secure?
- How are your employees paid? Are they paid more if you sign up for certain services? If the answer is yes, counselors might be pushing services you don’t really need to earn more. Consider going somewhere elsewhere.
Payday loans can be expensive; other credit offers may come with lower rates and costs. It’s important to look around and compare available offers before you decide to take out an online payday loan. Use the Internet but also check out other sources of information to learn about the reputation of credit providers.
1. Shop for the lowest cost. Pay attention to the annual percentage rate (APR) and the finance charge (including loan fees and interest, among other credit costs). You will want the lowest APR possible. If you are shopping online and can’t find the APR and the finance charge your might need to go their brick and mortar offices in person.
2. Consider a small loan from a credit union. Credit unions offer short-term loans for small amounts at rates competitive with other lending institutions. A local community-based organization may also offer small business loans. Cash advance on a credit card may also be possible, although chances are they may have a higher interest rate. Make sure the terms are clear to you and work towards your best interests before you decide.
3. Stay safe. Many consumers who applied for “quick cash” personal loans online later find out, much to their regret, that they had been hoodwinked into a scam. Some unwittingly paid upfront fees to get loans that never materialized. Worse, others discovered years later that the personal information they had given on their application was sold to fraudsters who used the information to harass unwary consumers or try to scam them again.
4. Do your homework. Make sure that the companies you plan to do business with are legitimate. Confirm their legitmacy with the Better Business Bureau, and verify previous instances of online complaints. Always remember that many scammers change names frequently to escape the long arm of the law. Avoid companies that promise loans regardless of your credit rating, because legitimate lenders will always take your credit history into account. When you do apply online, make sure you are submitting information only on a secure site. Look for a lock in your browser and a URL that begins with https://) and for third-party verification services like VeriSign.