Financial Tip of the Week from the Iowa Bankers Association:
During this holiday season, some consumers who are tight on money may consider turning to payday loans for extra cash. The concept of "instant cash," as promised by payday lenders, may sound convenient – but consumers should know that you'll end up pay extremely high interest rates and likely only add to your debt.
While other reputable lenders like your local bank are monitored and regulated by state and federal agencies, payday lenders are not. These lenders only rely on consumers needing cash right away with plans to repay it quickly. Payday loans – also known as "check cashing," "payroll advance" or "deferred deposit" loans – are intended to be emergency loans until your next paycheck.
Payday loans offer cash to get you through until your next payday, but you'll end up paying a very high price. Consumers may pay an Annual Percentage Rate (APR) of interest upwards of 100, 200 or even 300 percent. A payday loan of $500 repaid in one month could cost at least $50, an APR of 124 percent!
Avoid finding yourself in a money crunch by preparing for the unexpected. If you don't have a savings account, start by opening one at your local bank. Then begin to establish your emergency fund. This money should be saved to pay bills and other expenses in case you lose your job, need car repairs or have unexpected medical expenses. Generally, it is a good idea to save at least six months worth of living expenses in your emergency fund. The money in your savings account will be there when you need it – and you won't need to rely on an expensive payday loan.
These financial tips are provided by the Iowa Bankers Association (IBA), representing banks and thrifts in the state. For more information go to www.iowabankers.com.