Payday, Advanced-Fee and Guaranteed-Approval Loans

December 22nd, 2011

You’ve seen the ads: “No credit?  No Problem!” or “We’ll get you a loan regardless of your credit” or  “You’ve been pre-qualified!”  And our personal favorite: “We don’t care about your past, we care about your future!”

Advertised as guaranteed-approval these types of loans, which include advance fee loans, payday loans, cash advance loans, check advance loans, post-dated check loans and deferred deposit loans, promise to get you the cash you need quickly.  Maybe you need to pay bills, fix a roof, or repair your car. In some cases the sum of money advertised will wipe-out all of your existing debt.

In return, all that the company will ask for is a comparatively small up-front fee – ranging from $50 for a $250 loan to several hundred dollars for larger loan amounts.  But here’s a dose of reality: Legitimate financial institutions can never guarantee that you will be approved for a loan or a credit card – never.  Why would a company want to loan you money and at the very same time tell you that they don’t care about your credit history, the very thing that tells them the likelihood that you’re going to pay them back?  Does that make sense?

No – it doesn’t.  So what you’re then left with is a company that is going to do one of two things – either charge you a large up-front fee before giving you a single cent,  pocket the money and walk away, or a company that will charge you an exorbitant rate of interest (with APRs as high as 1000%) for your loan to compensate for the risk that you pose as a person with a poor credit history.  What could be worse, you ask?  There have been cases of companies targeting previous borrowers trying to collect on loans that they never borrowed in the first place.

What are the secrets behind PayDay loans?  Here’s a clever video produced by Community Legal Services in East Palo Alto (CLESPA):

What are the better options?

  • Check with your nearby credit union or a small bank.  Some banks may offer short-term loans for small amounts at competitive rates.  Even a loan at 18% APR, which may sound high, beats one that ultimately ends up being 400-1000%.
  • Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Nonprofit groups in every state offer credit guidance to consumers for little or no cost.

Read more about shopping for credit and loans here.  You can also visit the FTC’s Money Matters website for tips and other information on managing finances.

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The only shortcoming of living beyond one’s means. Ultimately, though, costs associated with debt repayment (fees, interest, etc.) diminish consumers’ ability to spend

A written, legally-enforceable representation that a product or service will meet a given standard of quality and/or performance. A word that, whether used in its noun, verb, or adjective form by advertisers, should be viewed with a healthy dose of skepticism by consumers

Annual percentage rate; the amount of interest charged to a credit card, loan or mortgage account balances annually.

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