Payday Loans Explained: Should You Ever Get One?

A payday loan is also referred to as a cash advance, deferred presentment, or a check loan. Payday loans are short term, given in comparatively small increments, and secured against that individual’s next paycheck. Payday loans originated in the early 1900’s, since then, the industry skyrocketed and now has an excess of over 22,000 locations throughout the nation.

The general idea behind these loans was to provide a quick, easy solution for people who needed cash before their next paycheck. Payday loan companies hold a predated check, provided by the borrower, until the next payday. They will cash the check unless you go in the store to pay off the loan including additional fees and interest charges. If an emergency arises and you are out of cash, a Payday loan may be the only solution, especially for car repairs, dental bills, and medical bills.

Demographics

Payday loans are mainly targeted to assist people in low-income areas. They are clustered around colleges and military bases, increasing their visibility in these largely populated areas where there is always a need for immediate cash. Another market consists of vulnerable consumers mainly composed of welfare-to-work females, senior citizens, low wage service sector workers and immigrants.

Process

Payday loan stores, check cashers and pawn shops offer payday loans. A local phone directory or a simple online search will have a list of many payday loan locations. With access to the internet it may be easier to find an online payday loan company that accepts loan applications directly through their website.

Applying for a payday loan is a simple process with the options to submit an application at a payday loan location, by phone, through fax or online. To process the loan, you must show proof of an active & open bank account, an ID verifying that you are at least 18 years of age, and evidence of income. The turnaround time for approval or denial of a loan can often be discovered within minutes; however the standard time-frame is typically within 24 hours.

Obtaining the Money

There are various methods available to obtain the cash including a wire transfer, in store cash pickup, or direct deposit. Each lender has different policies regarding the amount of money they will lend, most often ranging from $100 to $1,500. The amount of the loan will ultimately depend on how much you earn per paycheck. If you need more money you can apply for additional loans from different lenders.

Repayment

Payment for any loan is expected in full and due on your next pay date. To extend the period of time needed to pay back a loan either renew the loan and pay interest and fees only, renew the loan and pay interest and part of the principal or let the loan auto-finance.

It is imperative to pay off the loan as soon as possible to avoid substantially high, exponentially increasing, interest rates that can range from 400% to 790% APR. Failure to pay back a loan will result in legal action, and the inherent risk of being reported to a consumer reporting agency.

High Interest Rates

Payday loan companies claim that processing these small loans costs more for them than other lenders so charging lower interest rates would not be profitable for their business. Approving loans for high-risk borrowers presents significant credit risk for them, legitimizing their high interest rates. Current market pricing of the loans is supposedly commensurate with the inherent risks of such loans and applicable operating costs. These companies also believe that the fees for Payday loans are less costly to consumers than available alternatives such as bounced check fees and potential late fees associated with credit card and utility bills.

Rules & Regulations

Every state requires payday lenders to be licensed and subjects them to examinations ensuring they comply with applicable federal and state laws. States have different legislation in regards to payday loans and its lenders. During the past decade, new laws governing the industry have been implemented to protect borrowers. While some states allow loan companies to charge any interest rate on payday loans, other states have issued a cap on interest. There are even some states that do not allow payday loans at all. You can look up your state's guidelines here.

Benefits

There are some positive aspects of payday loans, the main ones being that they are easily obtainable, convenient, and the funds can be accessed quickly. They are extremely helpful for people who have low credit scores because there aren’t any credit checks. In tough financial times, when unexpected expenses arise, these loans can be life-savers. Payday loans are most appreciated when they are there to provide aid to those in disaster relief areas.

Issues

In tough financial times these loans can have an affect opposite to what they were originally intended to do. Since many borrowers do not understand the high interest rate trap tactics and the ongoing cycle of high-cost debt, they fail to recognize the ripple effect taking place. If a borrower cannot pay back their loan, they take out another loan to repay that loan. When they can’t pay back their second loan which was used to pay off the first one, they take another loan out, and the pattern continues from there.

The period of time allotted to repay loans is not enough, thus making it impossible to pay back. Returned checks from payday loan companies affect the borrower’s credit rating. Consumers can lose their bank account or may have difficulty opening up new bank accounts.

Payday loan companies use scare tactics and threaten delinquent borrowers with check fraud. Payday loan companies also don’t comply with the disclosure requirements of the Federal Truth in Lending Act. They disguise the fact that the rate of interest charged on loans is high; borrowers do not realize these rates are in the triple digits.

Alternative Options

- Use a credit card or credit card advance - Ask a friend or family member to borrow money - Obtain a Credit Union loan (better interest rates than a payday loan) - Work out a plan with your creditor - Take out a small bank loan - Request a salary advance from an employer.

The websites below are different programs for individuals who need small loans or financial assistance:

FDIC Small Dollar Loan Pilot Program

National Foundation for Credit Counseling

Protect Yourself

Take preventative measures to protect yourself from payday loan companies that do not comply with governing laws and who have unethical illegal business practices. First, check the governing bureau or regulator in the state or region that regulates commerce finances and securities to determine if the lender is licensed. Second, contact the Better Business Bureau to review complaints. Third, contact Federal Trade Commission to review past complaints filed.

When applying for a payday loan online, verify the loan lenders website is secure because submitting personal information through the internet poses a security and fraud risk. Always read and review the terms of the payday loan, the interest rate, applicable fees and the length and frequency of which you are required to make loan payments before signing. Make sure you can pay back the loan to avoid the common debt cycle.

To avoid having to obtain a payday loan, prepare for unexpected financial needs. Set up an emergency bank account and make deposits to it on a regular basis. Peace of mind is knowing that you have money set aside for a financial emergency.

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