FTC Consumer Alert
Federal Trade Commission Bureau of Consumer Protection Division of Consumer & Business Education
Payday Loans Equal Very Costly Cash:
Consumers Urged to Consider the Alternatives
“I just need enough cash to tide me over until payday.”
“GET CASH UNTIL PAYDAY! . . . $100 OR MORE . . . FAST.”
The ads are on the radio, television, the Internet, even in the mail. They refer to payday loans,
cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans. The
Federal Trade Commission, the nation’s consumer protection agency, says that regardless of their
name, these small, short-term, high-rate loans by check cashers, finance companies and others all
come at a very high price.
Here’s how they work: A borrower writes a personal check payable to the lender for the amount
the person wants to borrow, plus the fee they must pay for borrowing. The company gives the
borrower the amount of the check less the fee, and agrees to hold the check until the loan is due,
usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the
amount borrowed — less the fee — into the borrower’s checking account electronically. The loan
amount is due to be debited the next payday. The fees on these loans can be a percentage of the face
value of the check — or they can be based on increments of money borrowed: say, a fee for every $50
or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled
over.”
The federal Truth in Lending Act treats payday loans like other types of credit: the lenders must
disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and
the annual percentage rate (APR — the cost of credit on a yearly basis) in writing before you sign for
the loan. The APR is based on several things, including the amount you borrow, the interest rate and
credit costs you’re being charged, and the length of your loan.
A payday loan — that is, a cash advance