Payday loan guidance for borrowers

P2P loans start at $500 for Lending Club and $1000 for Prosper and typically take 2-3 weeks to complete. What if you don't need that much money, need it sooner, or cannot qualify for a P2P loan?

Many people who fall into these categories turn to payday loans. A payday loan (also called paycheck advance, payday advance or cash advance) is a small, short-term loan that is intended to cover a borrower's expenses for a week or two until payday.

Several months ago I found a listing on Prosper where a payday lender was looking for a $25,000 loan to help his business. I was intrigued that a payday lender would be seeking a P2P loan. I exchanged a few emails with him. He defended his business and explained how he is often the only option available to consumers with bad credit.

Many lenders on Prosper who loan to high risk or borrowers with low credit have faced high defaults and negative returns. Critics (including me) have sometimes blamed payday lenders for exploiting people's financial hardship for profit. Some of these payday borrowers ultimately look to consolidate multiple payday loans on Prosper or Lending Club. I wondered if payday lenders have high default rates and expensive collection efforts which require high fees to stay profitable.

According to a study by the FDIC Center for Financial Research, "operating costs lie in the range of advance fees" collected and that, after subtracting fixed operating costs and "unusually high rate of default losses," payday loans "may not necessarily yield extraordinary profits." Perhaps some payday lenders have difficulty producing positive returns after defaults and paying for the administrative overhead to collect outstanding loans.

I was recently contacted by a payday loan company called National Payday that was interested in advertising on PLR. After reviewing the site, I accepted their offer. They currently offer a free payday loan to first time borrowers. If you borrow $200 and pay back the full amount by your next payday there are no charges. Miss the payment, however, and you will be charged 25% of whatever you fail to pay. It is very important with payday loans to pay off the full amount promptly and then build an emergency fund so you do not have to borrow again.

The Federal Trade Commission provides the following guidance to individuals seeking a payday loan:
  • When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest APR - consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or friends. A cash advance on a credit card also may be a possibility, but it may have a higher interest rate than your other sources of funds: find out the terms before you decide. Also, a local community-based organization may make small business loans to individuals.

  • Compare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost.

  • Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge or a higher interest rate.

  • Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases - even small daily items. Their costs add up. Also, build some savings - even small deposits can help - to avoid borrowing for emergencies, unexpected expenses or other items. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies.

  • Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the funds in your account and if you make a mistake in your checking (or savings) account ledger or records, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection.

  • If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.

  • If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.
National Payday is a sponsor of PLR. If you are interesting in becoming a sponsor, email