Lenders dealing with payday loans have popped up at every nook and corner over the years. With the rise in unemployment and the recession hitting people in different parts of the world, money has become even more of a luxury. As the cash inflow reduced considerably, taking out loans to meet financial commitments became a necessity. This is where lenders dealing with payday loans and credit score started raking in huge profits. Here, we look into all the different aspects relating to such loans. Hopefully, by the end of the article, readers are more educated on what exactly payday loans are
What exactly is a payday loan?
The simplest way to define this would be saying that it is a short-term, high-interest loan. These loans are often given to people who are in desperate need of money and are capable of repaying the loan within short periods. The lender stands to gain significant profits in such cases because the interest rates are very high.
Ironically, only 14% of payday loans are paid on time (as per HG.org). Most of the loans go well past their due date, and the borrowers end up paying an excess of almost 100% as interest. As absurd as this sounds, this is a fact, and the truth is saddening to say the least.
In terms of legality, payday loans go unregulated in almost 26 states in the US. Another 9 states allow payday loans, but regulate it to an extent by imposing limitations such as the need for collateral, restrictions on the interest rate and the number of loans allowed by a single person. Approximately 15 states have declared payday loans as illegal in the interest of its citizens. In developing countries and under developed countries, payday loans find more popularity due to a lack of knowledge and heightened desperation.
As the world moves towards a cashless economy, most payday loans have become in the form of online transactions, with many websites now offering such loans. Payday loans are also known as cash advance loans and check advance loans. In the recent past, such names have found more popularity due to the stigma and caution associated with the term “payday loans” (and for good reason).
What are the disadvantages of payday loans?
Such loans tend to end up having an APR (Annual Percentage Rate) of almost 400%, which is 10 times the APR on credit cards. One main reason for the high rate of interest is the ability to receive such loans within a very short period with little to no legal formalities. People resort to such loans when in need of emergency cash.
Falling into a vicious cycle
Due to the characteristics of this loan, many fall into a vicious cycle where they default in paying an already high amount. The defaulting results in piling up of late fees and this, in turn, results in a total that is more than twice the borrowed amount. The statistics speak when it comes to defaulting in payday loans.
Access to the bank account
As surprising as this might sound, many lenders offer an option to avoid post-dated checks by having access to the borrower’s account. In such cases, if the borrower defaults in payment, the lender can make multiple withdrawal attempts resulting in many overdraft charges. This adds to the financial mess the borrower is already in
Threat to life
Considering that such lenders are not tied to any government entity, there is a lack of accountability. Things can easily take a turn for the worse, and lenders in this field are known to be dangerous. They will want their money back, and any defaulting, however large or small the amount is, can put the borrower and their family at huge risks.
Alternatives to these loans?
Inquire with banks
In an attempt to do away with such loans altogether, some banks have started offering short term loans at low-interest rates. Inquire with local banks if such loans are possible and go for those instead of the payday loans. The increased sense of accountability, along with the need of the government to care for their citizens, puts the borrower in a much better position.
Avoid the need for a loan
The best way to avoid payday loans is to avoid needing any kind of loan. Always ensure that proper budgeting is done regularly. Also, have a rainy day fund for any unexpected financial requirements that might come your way. It’s always better to be safe than sorry.