Payday Loan Realities

The quick cash infusion a payday loan offers may be helpful for one-time emergencies, like a medical bill, urgent car repair or unexpected income gap. But be aware: When you apply for a payday loan, you may wind up getting more --or less--than you bargained for.

Payday loans, also called cash advance loans, are short-term high-interest loans, generally for $500 or less, typically due two weeks later or on your next payday. There are no credit requirements. In fact, all you need is a valid ID, proof of income and a bank account.

The process of obtaining a payday loan is pretty simple. Once your income and checking account information are confirmed, a lender will give you the cash. In exchange, they'll ask for a signed check in the amount of the loan plus any additional fees--or permission to electronically withdraw from your account.¹ The process is similar with online lenders.

Understand the Real Cost

Fast cash comes at a high price. In the state of Washington, which caps the maximum payday loan amount at $700, the annual percentage rate (APR) on a two-week payday loan is 391%. By comparison, APRs on credit cards can range from about 12% to 30%. Is the extra cash worth the steep fees? That's an important question to consider.

If you can't repay the loan in full by your next payday, a new finance charge will be added and the cycle will restart. Renewing a payday loan or "rolling it over" is not uncommon. In fact, according to the Consumer Financial Protection Bureau, more than 80% of payday loans are rolled over or renewed within two weeks. So it's easy to see how in a few months, you could end up owing more in interest than the original loan amount.²

That's why it's important to have a strategy for repayment. Many payday loan borrowers get trapped in a cycle of debt, and that can have a dangerous ripple effect. In the short term, it can impact your ability to cover basic living expenses and medical costs. Long-term, it can be detrimental to your credit rating, your ability to save and your overall financial health.

Make Sure a Lender Is Legit

Across the US, there are approximately 23,000 payday lender locations³, which is almost twice the number of McDonald's restaurants. This number also doesn't include the growing number of online lenders emerging, many of which have been the subject of consumer complaints. According to a report by Pew⁴, 46% of online borrowers report that lenders made withdrawals that overdrew their checking account; that's twice the rate of storefront lenders. The same report shows that borrowers receive threats more frequently in online lending, with 30% of online borrowers saying they'd been threatened with arrest, and/or that the lender would contact their family, friends or employer. If you decide to take on a payday loan, first make sure the lender can be trusted with your finances.

Washington is one of the few states with laws regulating the payday lending industry. For example, the maximum payday loan amount allowed in Washington state is $700, or 30% of your gross monthly income - whichever is less. The maximum loan term is 45 days. The maximum fee a lender in Washington can charge is 15% on the first $500, and 10% above $500. That's still an APR of nearly 400%. To verify the license of a payday lender in Washington state (or an online lender that does business with Washington residents), call the Washington State Department of Financial Institutions (DFI) at 1-877-RING-DFI (746-4334) or you can verify a license online⁵.

Know Your Rights

If you decide to enter a payday loan agreement, keep in mind you have rights as a Washington state resident, including:

• You have the right to change your mind about a payday loan within one day.
• If you can't repay your loan before it's due, you can request an installment plan with no additional fees.
• It's illegal for a lender to harass or intimidate you when collecting a loan.
• Under the Truth in Lending Act, the entire cost of the payday loan must be disclosed. Among other information, a lender must provide you with information outlining the finance charge and the annual percentage rate (APR). It's important to understand every fee associated with a payday loan. If a lender isn't clear about what you're being charged, walk away.

Final Checklist

Payday loans deliver fast cash, but the consequences can be long-lasting and potentially devastating. So do your homework first and consider all your options.

• Before entering a payday loan agreement, comparison shop for a lender that offers lower rates and fees.
• Verify a lender's license by contacting the Washington State Department of Financial Institutions (DFI) at 1-877-746-4334 or online.
• Have a plan for repaying the loan. Avoid borrowing more than you can pay back with your next paycheck.
• Understand all the fees you'll be charged.
• Explore alternatives, like a loan from family or friends, or short-term financing options from a trusted bank or credit union.
• Work on establishing your emergency savings so you can avoid having to borrow at all, especially from a payday lender. BECU's Financial Health Check specialists can help you get started.