Considering a payday loan?  Before you take one out, read this first!  We give you five things you need to know before you shop for your first (or next) payday loan.

1. Understand Annual Percentage Rate: Payday loan finance charges generally range from $15 to $30 for each $100 borrowed. When disclosed as an annual percentage rate, this can range from around 390 percent to 780 percent. Truth-in-lending laws require that lenders must disclose the actual cost of credit in the form of annual percentage rate (APR).

APR DEFINITION: The annual percentage rate is calculated by a complex method that assumes your loan will be paid according to the term established. It breaks down all the costs of the loan, including the interest rate, and that rate is known as the annual percentage rate. On a 30-year fixed-rate loan, the APR is the actual annual cost of the loan if you make 360 payments.

Here’s another explanation for APR. Assume you have a loan with an APR of 12%. Every year, for each $100 you owe, you will be charged $12. At the end of a year you would owe $112 on a $100 loan, $124 on a $200 loan and so on. Put another way—APR is the cost of credit on a yearly basis.

Since payday loans are typically much shorter than 1 year in length, the APRs can be very high. Don’t use the APR of a payday loan to compare a loan with a mortgage—use them to compare loans from different payday lenders.  Which lender is going to give you the best loan rate?

Example #1 Payday Loan: The face value of your check is $230, loan fee is $30, and amount paid to borrower is $200. The lender receives $30, which translates to an APR of 458% if the loan is repaid in two weeks. If it is rolled into a new payday loan, another fee of $30 is charged, the loan amount is now $260, and the APR soars to 916%.

Example #2 Payday Loan: The face value of your check is $220, loan fee is $20, and amount paid to borrower is $200. The lender receives $20, however, the following APR is disclosed on the website: *Finance charges are calculated on the basis of $10 per $100 borrowed for each 14 day period, which is equivalent to an APR of 260.71%. This amounts to an APR of 521.42% for a $200 loan.

2. Understand What a Rollover is: Most payday loan borrowers renew or rollover their loan at least once. When a borrower files for an extension on their loan, it effectively rolls it over to a future repayment date which is the next paycheck. Additional fees are paid for each rollover which can create a seemingly endless cycle of debt. Most states allow unlimited rollovers. An exception is the state of Indiana which does not allow rollovers.

3. Know Who You Are Borrowing From: A red light warning should go off when you learn Internet payday lenders provide very little information about themselves and require insignificant amounts of information from the borrower. Often email addresses and toll free telephone numbers are the only payday contact information and no physical address exists. A borrower who is having difficulty with just such a company has a tough time making contact. On the other hand, collection tactics for payday loans can be aggressive. Lenders can require customers to sign an “Assignment of Salary and Wages” authorizing them to go directly to the borrower’s employer to collect the debt.  We recommend using an established faxless payday loan company.

4. Make Sure You Understand the Loan Due Date: Payment of the loan is due on the next payday unless the next payday is less than seven days away, then payment is due on the second payday. The maximum cash advance for the original payday loan is 30 days. A small number of competitive payday lenders will prorate the loan if it is paid prior to the payday.

5. Know the Basics About the Law  of Payday Loans in Your State: A Reno, Nevada judge reported that he has seen cases of APRs as high as 7,300 percent on certain payday loans. Almost 40 percent of civil cases in Reno’s courts and 34 percent of cases in Las Vegas courts are brought by payday lenders that have literally clogged the system. New state laws benefiting the consumer are being passed regularly. If you live in a state where payday loans are legal, you’ll be charged lower fees. In states where payday loans are illegal, the lender will not be licensed, will charge higher fees and you could be subject to questionable practices.   Always know about the law of payday loans in your State.