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FTC Advice to Borrowers Considering a Payday Loan

Monday, November 7, 2011 2:38pm
Women pondering a decision
With the advent of online payday loan services, it can be very easy for borrowers to get caught up in a cycle of recurring, automatic payments being drawn from their bank accounts. Now that instant cash at high interest rates are but a few mouse-clicks away from anybody with internet access, the Federal Trade Commission (FTC) seeks to cushion the risks borrowers’ subject themselves to by offering advice:

  1. Shop around and gather information from various payday lenders and lending sources. Credit unions and small private loan companies often offer short-term loans for rates lower than those offered by traditional payday loan lenders.
  1. In order to find the best deal, pay attention to the Annual Percentage Rate. Payday loan interest rates are often expressed in two-week terms, meaning the percentage seen is what a borrower must pay back within two weeks. If a borrower pays the loan off in two weeks, then the interest rate stated is what the borrower will be responsible for. However, if the borrower takes a month to pay off the loan (two two-week terms), then that interest rate is effectively doubled. This two-week term interest rate can grow exponentially if the loan is not paid off on time, leading many to feel a more accurate measure of a payday loan’s interest rate is the loan’s APR. The APR will show a borrower exactly how much interest he or she will pay on a payday loan if they were to hold that loan for one year before paying it off.
  1. Sometimes lenders grant extensions on payments if a borrower contacts them and explains their situation and how it has affected their ability to satisfy a timely payment. If an extension is permitted, then the high-interest payday loan may not be needed.
  1. Make sure your bank account has overdraft protection. If a borrower seeks a payday loan, the amount in their bank account is likely very low. Payday loan lenders now have the capability to withdraw payment from a borrower’s bank account as soon as a loan amount is due, which can lead to overdraft if the funds are not fully present in the account. In the event an overdraft occurs, borrowers are hit with a windfall of payment, as they were subject to a steep interest rate for the loan, and would also be forced to pay their bank’s overdraft fee.
After prudent investigation and wise selection, borrowers can avoid the inherent risks of online payday loans, and safely work with a payday lender in order to secure money in tight situations.