FTC Says Cash Advances Are CostlyCash Advance = Costly Cash "I just need enough cash to tide me over until payday."
"GET CASH UNTIL PAYDAY!...$100 OR MORE...FAST."
We have all seen the ads. They are everywhere on television, on the Internet, even in our mailboxes. The problem is that they all refer to cash advances, which can be terribly overpriced.
Companies that specialize in check cashing services and cash advances are making short-term loans that are known by many titles. They can be called cash advances, check advance loans, and deferred deposit loans.
The way they work seems simple; a borrower uses a post-dated personal check, made payable to the cash advance lender. The amount of the check is the sum of the amount borrowed, plus the lender's fees. The lender exchanges the post-dated check for cash, and holds the borrower's check as collateral.
The fees and interest that a lender may charge are typically based upon a percentage of the amount borrowed. For example, for every 50 or 100 dollars that is borrowed, a set amount must be paid back. Some states allow a borrower to "roll-over" or extend the length of the loan term, but the borrower is responsible for paying the additional fees associated with the extension. At the end of the loan term, unless it is extended, the lender either deposits the personal check or the borrower simply pays the amount back in cash.
Under the Truth in Lending Act, the total cost of a cash advance, like other loans, must be disclosed in full. Among other things, the borrower must receive, in writing, the amount of the finance charges, and the annual percentage rate of the loan.
The types of cash advances that are secured by personal check are a very expensive type of credit. Many people who borrow 100 dollars for the loan are subject to pay back 115 dollars at the end of the loan term. Even a short loan term, such as 14 days, is subject to this interest rate. In this example, the 15 dollars amounts to a 391 percent APR. If the borrower needs to roll over the loan 3 times, this amount would quadruple. If you find that you simply must have a cash advance, you should only borrow as much as you know that you can pay back from your next paycheck. When calculating this it is important to leave enough after repayment to get you through until the following payday, as well.
Alternatives to a Cash Advance Loan
Instead of using these high interest rate loans, there are a few options to consider. When you need a loan, shop around. Compare the APRs of several companies, and always look into their fees, as well. A company may advertise a lower APR, then add additional fees. You should also consider obtaining a short-term loan from your bank or credit union. Even if they use a standard loan, the rates and fees would be substantially lower. Just make sure that there is no early repayment penalty. Your employer may also offer an advance on your next paycheck. This is actually one of the better options, since there is no interest associated with these types of "loans."
A borrower may also consider either seeking help from family or friends, or obtaining a cash-advance from their credit cards. However, care should be taken if seeking a cash advance from a credit card company, as their interest rates may differ from the standard rates for purchases made on the card. Some cards offer 8 percent interest on purchases, but jump to 25 percent for a cash advance.
Another option that many people typically do not explore is the option of asking for an extension from creditors. Many creditors will issue an extension for only a small fee. Some creditors, such as utility companies, may not charge an additional penalty at all.
Regardless of the option that is chosen, everyone should have a realistic budget. It is not difficult to figure out a basic daily and monthly budget for your household. Typically, expenses do not vary greatly from month to month. Once you have your budget, stick to it. Avoid things that are not on the list. Everyday items such as coffee and snack food can quickly chew a hole in even the best budget.
Consider opening a small savings account. Put a few dollars in at a time, and build it up slowly. That way, if an emergency expense does arise, you will be able to take care of most, if not all, of it without resorting to a loan. For example, if you put just the fees associated with a 300 dollar cash advance in the bank over a 6 month period, this will provide you with a substantial emergency fund.
Also, check with your bank to see if you can get overdraft protection on your checking account. If you operate on a "zero budget" meaning that you are always spending all, or nearly all, of the money from your checking account, even a small accounting error can result in a bounced check. Bounced checks can harm your credit, so it is important to keep abreast of things.
If you find yourself needing regular help working out a repayment schedule or a debt repayment plan with your creditors, or even just need help working out your budget, you can certainly contact a local credit counseling service. There are non-profit organizations in every state that specialize in helping people just like you with their financial planning needs. Many employers offer low- or no-cost credit counseling through the same bank that issues their payroll.
To Complain - For More Information
If you believe that a lender has misled you, or violated the Truth in Lending Act, you can contact the FTC, the governmental agency that regulates the industry.
The Federal Trade Commission works on the side of the consumer to protect against fraudulent business practices. They offer many programs that are designed to help the consumer spot and avoid unfair transactions. Consumers can visit www.ftc.gov 877-FTC-HELP for more information. TTY users should dial 866-653-4261. The FTC maintains Consumer Sentinel, an online database for law enforcement and civil authorities worldwide.