A debit card payday loan is a short term loan made against the guarantee of your debit card, with the agreement that the loan will be paid back on your next payday. If you're facing a temporary cash shortage, a debit card payday loan can be a tempting quick fix.
Your need may be as basic as suddenly being out of groceries, or as unique as needing a bit extra to fund an engagement ring or a big celebration. You may be confident that you can cover any debit card loans by your next payday, but there are many risks to these loans.
The loan period is usually about two weeks and finance charges on these payday loans are typically in the range of 15-30% for the two-week period. That may sound like not much more than credit card interest rates, but translated into an annual percentage rate (APR), that's a whopping 390 percent to 780 percent - far, far more than the most exorbitant credit card rates.
Despite the high interest rates, the convenience of payday loans is another part of what makes them tempting. There are many online loan companies that will extend debit card loans without you needing to do more than provide bank account, Social Security and employment information. It can be almost as easy as setting up an account with something like eBay - but the risks are much greater.
Debit card payday loans can be easy to get - making them attractive to people with poor credit and short term needs - but difficult to get out of in the long run.
Debit Card Payday Loans: The Danger of Getting Caught in a Cycle
If you reach the end of your loan period and don't have enough in your bank account to pay back the loan, you face several problems. The loan company will attempt to transfer the funds from your account - if the funds aren't there, your bank will charge you an overdraft fee. Then, the loan company will charge you a fee for not paying the loan, and flip the loan over to your next pay period. The high interest fees will continue to apply to the loan as well, further hiking up the amount you owe.
This triple threat - overdraft fee, loan default fee, and continuing high interest rates - can land you in a cycle in which you struggle to pay off the loan by the end of each pay period. If you can't pay it off in full, the loan will continue to flip and accrue interest. You'll be caught in a punishing cycle.
Debit Card Payday Loans: Surrounded by Controversy
This punishing cycle is one of the reasons debit card payday loans are so controversial and are even illegal in some states. Some legislators have campaigned vigorously against debit card loans companies, accusing them of trapping people in cycle of credit dependency, and of aggressive, misleading advertising and billing practices.
In 2008, the Illinois Department of Financial and Professional Regulation fined a company $234,000 for exceeding the $15.50 per $100 limit on charges for payday loans. A customer had not only been charged more than the company was entitled to collect under the Illinois Payday Loan Reform Act, but also received warnings that the account was 'seriously delinquent' and that the unpaid balance was hundreds of dollars more than the customer had legitimately borrowed and paid back.
Think Carefully Before Taking a Debit Card Payday Loan
So if you're facing an unexpected cash shortage, think carefully before taking debit card loans. Look closely at the interest rates and don't be fooled by low-sounding two week rates that translate into exorbitant annual percentages. Make sure the company you're borrowing from doesn't have a history of aggressive or misleading practices. And, if you do decide to take a debit card payday loan, make sure you really can pay it off in full at your next payday.
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