Is a payday loan right for me? | The First National Bank Blog

May 12th, 2015

payday loan scrutinyMost people have months where they need help making ends meet. An unexpected car repair or medical bill results in pulling out a credit card or seeking a bank loan. Some consumers, however, turn to payday loan companies for help. Payday loan amounts vary depending on maximums set by the 27 states that allow this form of lending. Typically, the loans are between $100 and $1,000 with an average loan term of two weeks. There’s generally no credit check, making payday loans easy to get. The drawback is that these loans come at steep price—on average 400% in interest per year.

“But the loan is only for two weeks, not a year—right?”

Unfortunately, many consumers must take out additional payday loans to pay the interest on the original debt, creating a debt cycle that can continue until the borrower is forced to file for bankruptcy. Payday loan debt is currently the third leading cause of bankruptcy following medical and credit card debt.

To safeguard borrowers, the Consumer Financial Protection Bureau recently proposed new regulations for payday loan companies:

  • All loan companies must make sure prospective borrowers have the ability to pay the money back.
  • Payday lenders must offer manageable repayment terms.
  • Payday lenders can’t issue more than six loans a year to any single borrower.
  • Payday lenders must provide three days’ notice before withdrawing funds from a borrower’s bank account.
  • The number of withdrawal attempts must be limited to avoid triggering multiple overdraft fees, as well as returned checks that can harm a consumer’s credit rating.
  • Loan amounts cannot exceed $500 and interest rates must be capped at 28%.

Alternatives to high cost, short-term loans

  • Apply for a loan from your local bank. The First offers personal installment loans at competitive rates: https://www.fnbn.com/lending/personal-installment
  • Get a cash advance card from a reputable credit card company. The interest rates are fairly high, but nowhere near the 400% APR charged by payday lenders.
  • Ask friends and family for help; develop and follow-through on a specific plan to repay them.
  • Consult a reputable consumer debt counseling organization. There are several free ones, so avoid any company that charges a high fee. This link from The First can help: http://www.ccc-credit.com/

Do you believe payday loan companies harm or help consumers? Let us know in the Comments section.

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