Payday loans are short-term loans with a very high rate of interest. Also known as cash advance loans, check advance loans, deferred deposit check loans, post dated check loans and high-risk loans, they seem to be an expensive solution to those who have trouble in managing and spending money carefully. Payday loans are one of the most expensive forms of credit. These loans are perceived as a short-term solution to temporary cash flow problems.

Payday loans can be a vicious cycle that can entangle them in a quagmire of spiraling debts. The reason why people are lured to payday loans is because in less than thirty minutes, with no questions asked, no credit checks they get the amount they desperately need by giving the lender a proof of income and their bank account. To the borrower it is both a blessing and a curse, blessing as it temporarily solves some problems but a curse as it can trap them. The borrower does not realize he is not solving problems but merely creating even bigger problems that probably cannot be solved. The recipients of payday loans are low-income people who have no alternative source of credit. Such people are usually not in a position to repay the loan and thereby extend the loan several times making them pay a larger interest than the principle amount they had borrowed.

If a person had to borrow $100 for a period of 14 days, he would have to write a post dated check for $115 and give it to the lender. The annual percentage rate or the APR for this transaction, which is the cost of credit on a yearly basis, is 391 %. If the borrower wants to roll over or extend the loan for three more times he will have to pay an interest of $60 for a loan of $100.

Lets take the case of a person B who borrowed $200 from a payday store to repair his car, he wrote them a check for $250. Since then he has been paying them $50 biweekly and paid $500 but as he had extended the loan he still owes them the original $200.

There is the case of D who borrowed a series of small loans ranging from $600 to $1875 from August 1997 to February 2005 and has been made to pay $19,500 in interest alone. Borrowers usually end up paying large amounts of interest on successive small loans

A bill was passed in Washington State in April 2003 regulating check cashers and sellers. The bill created a comprehensive statutory scheme to regulate the payday loan industry that included several consumer protection provisions too.

According to the Bill:

The maximum term of the loan is 45 days. The loan can be extended provided no additional fees or interest is imposed.

The maximum balance that may be owed by a borrower to a lender on one or more loans cannot exceed $700.

The interest rate is 15% for a loan amount below $500. If the borrowed amount exceeds $500 a 10% interest is charged for the portion of the loan exceeding $500.

One post-dated check is allowed as collateral per loan sanctioned. No other form of

collateral is allowed.

In the event of a default by a borrower, the following restrictions apply:

» As determined by the DFI {Department of Financial Institutions} rule, the lender may charge only a one-time fee to the borrower.

» Lenders are permitted to take civil action but can recover only the principle amount and the collection charges.

» Lenders are prohibited from threatening the borrowers with criminal prosecution as a part of its collection efforts.

» Payment plan: If a person has successively borrowed four times and if he has not defaulted on the last loan, the borrower is entitled to work out a payment plan with the lender subject to the following conditions.

» An agreement in writing that is signed by both parties is required.

» The borrower gets 60 days to pay off the loan

» The borrower is allowed to pay the loan in three payments.

A borrower has the right to rescind the loan within one day of its inception.

Rescission is effected by the borrower returning the principle amount to the lender.

The lenders must comply with federal laws including the Truth-In- Lending Act and make specific disclosures to its clients. The APR must be disclosed.

Payday outfits target the minority community, those who have an annual income below $50,000, people who have a small but fixed income and also the military.

Possible legal claims against payday lenders include

» Truth-In-Lending Violations

» State payday lending law violations

» Usury

» Racketeer Influenced And Corrupt Organizations Act (RICO) claims

» State Unfair And Deceptive Acts And Practices (UDAP) claims

» Fair Debt Collection Laws

» Common Law Claims

» Licensing Violations

The AARP, Consumer Federation Of America and the Consumers union can be approached for help in case of abuse by the lenders.

AARP

601 E St., NW

Washington, D.C. 20049

1-800-424-3410

http://www.aarp.org/

Consumer Federation of America

1424 16th St., NW

Suite 604

Washington, D.C. 20036

(202) 387-6121

Consumers Union

Washington D.C. Office:

1666 Connecticut Ave., NW

Suite 310

Washington, D.C. 20009

(202) 462-6262

West Coast Office:

1535 Mission St.

San Francisco, CA 94103

(415) 431-6747

http://www.consumersunion.org/

Credit Unions are fast becoming an alternate to the payday lenders by offering smaller loans at reasonable rates.

The Coalition of Community Development Financial Institutions, 215-923-5363, http://www.cdfi.org/ and the National Federation of Community Development Credit Unions, 212-809-1850,http://www.natfed.org will provide more help for those interested in credit union loans.

Before opting for payday loans try asking friends or relatives for money, try asking the employer for cash advance on the paycheck or consider a cash advance on your credit cards.

Borrow only as much as you can repay with your next paycheck, repay the loan on time, and borrow only from one lender at a time.

Payday loans can lead to bankruptcy and complicate financial matters so think twice before borrowing and if situation makes it necessary to borrow, be sure to make provisions not to extend or roll over the loan.

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