Why Many Payday Loan Customers Use the Service to Cover Small-Dollar Expenses

Finance (Photo credit: Tax Credits)

Over the years, the usefulness of payday loans has continued to increase. For many of the population payday loans are used as a quick source of cash in an emergency. The unforeseen costs of seeing a doctor or having a needed car repair done can force many to overdraft their bank accounts or exceed the credit limit of a credit card. Many still write that check or charge on their credit card. Your bank gladly makes your check good and charges you a fee of $40 or more. The credit card company also rewards you with an over credit limit fee and raises your monthly APR.

Even with all the negative press payday loans get, they are actually cheaper than going into overdraft, for short term cash needs. The average fee for $100 of credit is $17.60 at a payday loan compared to bank overdraft fees of $30-$35 in 2012(FDIC).

Overdraft fees are more of a problem with people who carry a low balance in their account. Not going into overdraft and saving the penalty fees associated with it can add up to a real savings over time.

"When used on a recurring basis for small amounts, the annualized percentage rate for fee-based bounce [overdraft] protection far exceeds the APRs associated with payday loans."

Sheila Bair

Former Chairman

Federal Deposit Insurance Corporation

Like all financial obligations, payday loans need to be taken seriously by the borrower and the lender. How do you know if your lender is a legitimate concern and obeying the laws for payday loan lenders in their state.

Go to the website of the lender you want to use. Look for an "About Us" link. An upstanding company has extensive information about themselves. Look for information about their license to operate in the state. Do they provide complete contact information. Look for links and phone numbers of state regulatory departments with contact information. Use the information and call the states regulatory division and ask questions. 

Also look for the emblem of the Community Financial Services Association of America. This association sets guidelines and best practices that ensure responsible conduct among lenders, protect borrowers’ rights, and encourage self-governance of the payday advance industry. Their website has a hotline where you can voice concerns and problems you are having with the lender.