Payday advance loan iowa

Paycheck advance service can be a costly option for the user

Paycheck advance service can be a costly option for the user

Like many newcomers to Southern California, Brian experienced a serious "cost-of-living shock" when he had to start paying bills and setting up a household. The Iowa native, 21, is happy he moved but distressed that he can't seem to survive financially.

In the past few weeks, after depositing $700 on the apartment he shares with afellow service station worker and connecting utilities, Brian has found himself flat broke. Now, because his first decent paycheck is several weeks away, he worries about paying next month's rent and buying groceries.

Since he has no savings left and is close to his credit limit ($750) on his single credit card, he is considering an option mentionedby a new acquaintance: obtaining a paycheck advance from one of the many outfits offering such services. If he cannot find cash elsewhere, Brian has asked for guidance on how such firms work and if he should be cautious about doing business with such companies.

The financial picture

Brian earns $315 a week. He plans to start taking community college classes as soon as he gets better established, with the goal of eventually getting a better job and transferring to a four-year institution. Besides his 14-year-old car, worth about $1,300, Brian has no assets. His income barely covers his monthly expenses: rent, $360; food, $160; utilities, $95; gas and automaintenance, $90; and clothing and incidental expenses $50. He was spending $75 a month on entertainment, but has discontinued that until he is better off.

Plan of action

Payday-advance firms operate by giving workers a short-term advance against their next paycheck, for a fee. The firms typically require that customers have both a regular job (or a steady income) and a checking account in active status, and legal identification. The worker asking for the advance writes a check, post-dated for an agreed-upon date (typically coinciding with the next payday), and pays an additional service fee and possibly a new-account fee as well. Then the firm advances the money minus the fees.

The rationale for such services is obvious: they target the consumer who is unable to obtain cash in a hurry for one reason or another, and may not have access to credit advances.

It's the fee structures that anger consumer groups and attractregulatory scrutiny. Although many firms operate above board and charge relatively reasonable fees, others have been criticized, and in some cases penalized, for their unsavory (or downright usurious) practices, such as charging first-time customers up to $50 on a $150 advance.

Typically, repeat customers are simply charged a single fee -- about $20 for a $100 advance, or $30 fora $200 advance. In the latter example, if Brian obtained the $200 advance and paid $230 in exchange fora 14-day loan, that equals an annual percentage rate of 390 percent.

The industry counters complaints about its high fees by claiming that paycheck advance firms providea valuable service that helps strapped consumers avoid worse eventualities, such as cut-off utilities or eviction. And they note that bounced check fees easily can exceed the payday-advance fees.

Although the industry overall has been criticized for its high fees and lack of clear loan terms, legislation passed in several states,including California, and the work of advocacy groups are helping to better protect consumers.

In most states, the laws focus on fee disclosure and limits. In California, payday-advance companies may not charge more than15 percent of the face amount of the check, plus a $10 fee for first- time customers. In the other states that have enacted related legislation, fee limits run from 10 percent to 25 percent of the amount loaned, and some states have set "caps" on the maximum fee the lenders may charge.

Of course, it's best not to use payday-advance services unless there is no other way to get cash. Starting a pattern of "robbing Peter to pay Paul" is hard to break. If Brian has no option, he at least should ensure that a payday advance firm's fees, terms and policies are clearly stated and follow the law.

Stephanie Enright is the co-author of Strictly Business: Planning Strategies for Privately Owned Businesses. Moneywise appears weeklyin the Business section. If you need help planning your personal finances, write to Stephanie Enright, c/o the Daily Breeze, 5215 Torrance Blvd., Torrance, CA 90503-4077, and include a stamped, self- addressed envelope. You will receive a confidential questionnaire to fill out and return. Questionnaires also available at the Daily Breeze. Only letters chosen for publication will be answered; your real name will not be used.