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Beware of the dangers of holiday loans

  • Published
  • By Lt. Col. Richard Desmond
  • 72nd Air Base Wing Staff Judge Advocate
Many advertisements appear in newspapers, on the radio and on television touting low-cost payday loans just in time for the holiday season. 

Companies try to lure customers with items ranging from T-shirts to free turkeys. The media is filled with advertisements and offers of extended hours during the holiday shopping season because they know this is the time of year when people need extra cash. 

What the payday lenders don't advertise about the loans are the enormous cost of taking out such loans, loan terms that enable the lenders to dodge regulations set by state law, and annual percentage rates that often are well above 250 percent. 

Check cashers, finance companies and others are making small, short-term, high-rate loans that go by a variety of names: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans. 

A payday loan is a short-term loan obtained when a borrower writes a check dated in the future. To get a loan, a borrower must show the payday lender a pay stub and then write the lender a check for the cash loan. The check is usually made out for a later date - often one month and one day after the date of the loan. The lender gives the borrower cash in return, but for an amount less than the value of the check. 

The difference between the amount for which the consumer writes the check and the amount the consumer is paid in cash is the lender's profit, or finance charge. 

Payday lenders often charge between $15 and $50 for every $90 borrowed, which only covers the few short weeks of the loan term. After that, the consumer must pay the lender back or pay the lender even more in finance charges. 

Most of the time, a consumer doesn't have the funds in his or her checking account to cover the post-dated check when it is written, and may not have the funds when it comes time for the check to be cashed. When payment comes due, if consumers can't cover the check, they are often encouraged to roll the overdue loan into a new loan, incurring new fees and increasing the amount of the loan. 

This loan "flipping" easily can lead to the consumer using most or all of the money borrowed to pay the lender's costly fees. 

Let's say someone were to write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until the next payday. At that time, depending on the particular plan, one of three things could happen: first, the lender deposits the check, second, it is redeemed by paying the $115 in cash, or, third, it is rolled-over by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If the loan is rolled-over three times, the finance charge would climb to $60 to borrow $100. 

Under the Truth in Lending Act, the cost of payday loans - like other types of credit - must be disclosed. Among other information, you must receive, in writing, the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis). 

Consumers have other options. There are community banks, credit unions and small loan companies that compete for consumer business by meeting their needs without making them pay exorbitant fees and interest rates. These banks will make short-term loans at comparatively low interest rates, and they require little more paperwork than the payday lenders to qualify the consumer for the loan. These lenders may prove to be far more affordable for the consumer when it comes to paying back the loan. 

If a lender has violated the Truth in Lending Act, a complaint should be filed with the Federal Trade Commission. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them.

The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

To file a complaint or to get free information on consumer issues, visit or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.