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Payday Loan Rollover and APR

We are in a time where finance companies, check cashers and other businesses are making high-rate, short term loans. Commonly, a borrower will write a payable check to a lender for the amount she or he wishes to borrow in addition to the fee. The borrower then receives the mount of the check minus the fee. Usually the borrower will pay the fee for the amount borrowed or a percentage of the face value of the loan. If one decides to extend or “roll-over” the loan, say for an additional two weeks, the fee will be charged for each extension. The Truth in Lending Act states, like other types of credit, the cost of the loan must be disclosed. You must receive in writing, the finance charge in a dollar amount and the annual percentage rate, or Apr. A payday loan is expensive credit. Say you get a payday loan secured by a personal check. You write a check for two hundred and thirty dollars to borrow two hundred dollars for up to fourteen days. The lender will then deposit your check. You have the option to redeem your check by paying two hundred and thirty dollars, or roll-over the check by paying a fee for extending the loan for an additional two weeks. Clearly, the interest on this loan will climb high with a fifteen dollar finance charge, a three hundred and ninety one percent Apr. If one were to roll-over the loan three times, the finance charge would climb to one hundred and twenty dollars for borrowing two hundred dollars.

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