Helpful Information about Payday Loans »

I'm in need of some money and cannot get a loan. I have several payday loans that I cannot get paid off. I've been trying for several years and I only have enough money to renew. If I cash out my 401k to pay these loans off, I will have plenty of money each month to put back in my 401k plan. Will I still face the extra 20% penalty at tax time? I've learned my lesson and I will never get mixed up with paydays again. I think they should be outlawed.
Michelle

They're also known as cash advance loans, check advance loans, post dated check loans or deferred deposit check loans. The Federal Trade Commission has called them "costly cash." There are over 10,000 payday loan "stores" operating and it's estimated that they collect over $2 billion a year in fees and interest.

Typically the borrower, in this case Michelle, would write a check for the amount of the loan that she wants plus a fee. The size of the fee is based on how much money she's borrowing. The lender agrees to hold the check for one or two weeks. Typically until Michelle's next payday.

At that time Michelle can come in with cash to "redeem" the check, she can let the lender deposit the check or she can "roll-over" the loan until her next paycheck. If Michelle chooses to roll the loan, she'll incur another fee.

Payday lenders have the upper hand in collecting. If Michelle can't redeem the loan or refuses to roll it, she'll be informed that they'll deposit her bad check. If it bounces, she'll face criminal charges of intentionally writing bad checks. Not to mention bounced check charges from her bank.

Many payday lenders don't want Michelle to know how much she's paying. A Public Interest Research Groups survey found that only 37% of the lenders quoted an accurate Annual Percentage Rate even though the federal Truth In Lending Act requires it.

"Usury" laws govern most loans. Those laws limit the amount of interest that can be charged on a loan. The PIRG survey of payday lenders found interest rates that ranged from 390% to 871%. The average APR was 474%! The same study showed that in one state 77% of the loans were roll-overs.

Presumably, Michelle wouldn't be taking a payday loan if she could have gotten the money somewhere else. She would have paid less interest by using a credit card cash advance or borrowing from friends or family. A cash advance on a credit card would cost Michelle between 35% and 50%.

She's considering taking money from her 401k plan. Any withdrawal will be subject to a 10% penalty and will be added to her taxable income for the year. So she'll probably lose 20% of the withdrawal to the federal government. But that's better than paying 400% APR.

Michelle may have a better choice. Borrowing from her 401k plan would provide the money she needs now and allow her to pay it back through payroll deduction. She should speak with the human resources department to find out the details about a 401k loan. The biggest advantage is that money borrowed is not subject to tax penalties or added to her income for tax purposes unless she doesn't repay it.

Other options that don't involve her 401k should also be considered. If she's eligible for overdraft protection at her bank, she may want to sign up. The bank fees would be less expensive.

Payday loan companies have sprung up primarily to serve clients who don't qualify for a credit card. If Michelle is among this group, she should check her credit report for errors. Roughly one in four reports contain a significant error. A corrected report might qualify her for a credit card. And cash advance privileges.

If Michelle has other monthly payments, she might be able to have one or more of them either reduced or delayed. A call to the creditor might be all it takes.

Another alternative, if she has other debts, would be to see if credit counseling or debt consolidation would work for her. Either could reduce her regular payments and free up some money to pay off the payday loan.

Finally, Michelle should cut any expenses that aren't absolutely necessary. This is a time for drastic measures.

Michelle is in a tough spot. She needs to get these loans paid off before they force her into bankruptcy. Hopefully, one of these tools will help her dig out of debt.

Payday Loans Comparison

Comparing payday loan lenders, also called cash advance lenders, online guarantees that you will find the lowest rates and best terms. Payday lenders are required by law to post their rates and terms, so making comparisons is just a matter of a few clicks of the mouse.

Look At Rates

The first point to compare amongst payday loan lenders is interest rates. While payday loans are short-term loans, usually only lasting two weeks, the Truth In Lending laws require payday loans and cash advance loans to be posted by APR. You can find this information on payday loan lenders’ websites under categories like APR Disclosure, FAQ, or Loan Information. You can also email the lender requesting the current APR.

Ask About Fees

Fees besides the interest charge also add to the cost of the loan. Some payday loan lenders simply have a flat financing charge, while others include a processing fee. Fess should be disclosed along with financing fees, so you can quickly compare the loans true cost.

Compare Terms

Ideally you will pay back your cash advance on your next payday, but financial emergencies happen. You can be prepared for this by researching the terms of repayment of the different payday loan lenders. Most lenders allow you to make a minimum payment of just that period’s interest charges, but it is best to have it in writing. Also, research the fees you will accrue with delayed payments.

Find Customer Service

Make sure that you can contact a customer service representative through email, phone, or fax. While you probably won’t need any help with the application process, you do want to be able to contact the payday loan lender if you want to change your repayment plan or ask a question.

Expect An Easy Application Process

With today’s technology, you should expect a quick payday loan application process. Applications should be processed over the Internet within minutes with no fax needed. The only information required is your personal contact information and employment history. There is no credit check for a payday loan. You can also expect to have your cash advance deposited in your checking account the next day.

Benefits of Short-term Loans

Short term loans can be a lifesaver when you are in a financial pinch. If you qualify for a short term personal loan, you are likely to have an interest rate that is much lower than those for credit cards. You are better off applying to a traditional bank or credit union, because their rates are usually much lower than payday lenders. The loan will usually have a term of two years—although payday lenders offer much shorter terms for correspondingly much higher interest. At the end of the term, you've paid back the principal plus interest, and you're done. None of this carrying debt forever by paying low minimum monthly payments that barely make a dent in the principal amount owed like with credit cards. Another perk of these loans is that they can usually be approved in as little as one day, three at the most. Plus, personal loans are pretty much no-strings attached at least as far as what you spend the money on. Spend it how you will, but make sure you pay it back according to the agreed upon terms.

Click Here to Create fun quizzes about Payday Loans »