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When cash is tight and bills are looming, some consumers turn to payday loans. If not approached with caution, these loans can snowball into large debt, with high interest rates and collection tactics under pressure.
Payday loans involve borrowing money against your next paycheck. Borrowers write a check for the amount they want to borrow, plus finance charges, and receive the money. The average loan term is around two weeks, but loans can – and often are – renewed.
Payday loans can come with exorbitant fees; current finance charges are $ 15 or $ 30 for every $ 100 borrowed, and annual interest rates can run into the hundreds. In Missouri, the maximum annual percentage rate for a payday loan is 462%, although state law limits the total interest and charges for the life of a payday loan – including all renewals – 75% of the original loan amount. Illinois law caps payday loan interest rates at 404% APR. These high interest rates can force these borrowers to renew their loans and pay new fees every two weeks until they can finally save enough to pay off the principal and get out of debt.
Payday lenders can attract people who might not be able to get a credit card or bank loan, but they can create a dangerous cycle of debt. Consumers should understand the costs before borrowing.
BBB received over 1,200 complaints about payday lenders in 2019. Many complaints were about high interest rates as well as difficulty canceling a loan agreement or getting reimbursement for automatic payments withdrawn in error. In April 2020, a man from St. Louis told BBB he prepaid a loan from a local payday lender, but the lender continued to call him about the daily interest and offer him a different reimbursement amount.
Additionally, BBB Scam Tracker has received numerous reports of online payday loan scammers tricking desperate borrowers into wiring them upfront fees but not receiving any funds in return. A consumer in St. Louis said he lost $ 200 after being contacted by a payday lender who asked him for an upfront fee in the form of two gift cards.
Tips to help consumers become savvy borrowers:
• Do your homework before you borrow. View the lender’s BBB company profile on bbb.org. It includes the history of the company’s complaints and how they were handled, customer reviews and more.
• Beware of upfront fees. Some short-term loan providers require a post-dated check to cover the amount borrowed plus interest and fees. However, if a lender asks for this cash fee before giving you any money, stay away, especially if it is an online lender who requests money by wire transfer, who cannot to be found.
• Limit the amount you borrow. Borrow only what you know you can repay with your next paycheck. Most companies will allow you to “renew” the balance for several weeks or months, but will charge you a fee all the time. This may require you to owe several times the original amount you borrowed.
• Know your rights. Payday lenders are required to disclose certain information before taking out a loan. This information includes the cost, the interest rate to be paid and the specific fees that will be paid.
• Read the fine print. Pay attention to the costs and consequences of non-payment. Will the company allow you to make arrangements if you cannot pay?
• Keep your documentation. Many consumers report receiving calls from collection agencies long after paying off a payday loan. Some calls are simple mistakes, but others are scammers’ attempts to collect debt that is not due. Protect yourself by having documents proving that all loans are repaid in full.
• Know who to turn to. If you believe a lender has committed fraud or taken advantage of you, file a complaint with BBB and the Federal Trade Commission.
Stephanie Garland is director of the Better Business Bureau in Springfield. Some of the counties served by BBB Springfield include Jasper, Newton, McDonald, Lawrence and Barton counties. Emails can be sent to [email protected].
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