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Consumer Advisory Bulletin-1999

"Payday Loans" -- Dollars Down the Drain?

"Cash 'til Payday!" "Instant cash!" If you're running short of money, such ads invite you into one of the "payday loan" or check-loan businesses that have exploded in Iowa. They'll give you cash to tide you over until your next payday. (Hence the name "payday loans.") Convenient? Sure. But -- are you willing to pay for that convenience at an Annual Percentage Rate (APR) of 300 to 400 percent?

More and more often, people who are stretched financially turn to payday lenders. But when money's tight, paying triple-digit interest rates for short-term loans just siphons more money out of budgets that already may be running on empty.

Here's how payday loans work: If you want $100 in cash, you write them a check for $116.67. (The difference is their fee.) They give you $100 immediately. They hold the check until the date you agree they can deposit it, or you come back and give them $116.67 in cash or money order to get the check back from them. Usually, that's two weeks, although it could be up to one month. That two-week, $100 loan works out to an APR of over 434%! Getting a $200 loan for two weeks will likely cost you a $27.78 fee -- a 362% APR.

Just for comparison, compare those credit costs to the 24% APR that is considered very high for credit cards. A $100 loan for two weeks at a 24% APR would cost 92 cents, a whole lot cheaper than $16.67. A $200 loan for two weeks at 24% would cost $1.84, nowhere close to $27.78. Payday loans pull a lot of dollars down the drain -- especially if you obtain payday loans often.

What can you do? If possible, stop and think about "paying yourself" the fee instead of going to a payday lender. That will help you build a savings reserve for emergencies. If you need emergency cash for important bills, search for alternatives. For example, if it's a utility bill that's pressing, check first with the utility company about emergency assistance programs. If you're having trouble paying bills, remember that trying to pay them with triple-digit APR loans is likely to sweep you even further downward in a spiral of worsening debt.

For more information, contact the Attorney General's Consumer Protection Division, Hoover Bldg., Des Moines, IA 50319. The phone number is 515-281-5926.

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