Payday loans - Why you should not take out one
Payday loans seem to be a much easier alternative when you are struggling to overcome a financial emergency and you don't have the required fund. However, there are certain reasons for which a payday loan may not be a feasible option.
But before discussing that, let’s see,
What is the secret behind the success of the payday loan lenders?
Payday loans (pdls) offer quick cash to the consumer without much hassle. This is the main reason why payday loans are so popular in the country. Unlike the credit cards and other loans, You can take out a payday loan without any credit check and the amount usually gets deposited in your bank account within a day. consumers can receive payday loans within a credit check and the amount gets deposited in the bank account within a day or two.
Lenders don't even bother to check the credit score of the consumers.
This makes the task easier for cash-strapped consumers. They need the money and the payday loan lenders are providing it.
Why is it important to avoid payday loans?
When you take out a payday loan, generally, you can handover a personal check to the lender for the money they’re giving you. The lender will cash-in the check on the date (your next payday or any other agreed day) written on the check.
The process appears to be so simple.
Then why are people speaking badly about the payday loans?
Why have the 13 states in the country prohibited the payday loan business?
Payday loans often get negative publicity from the web and print media. Renowned financial experts are advising people to stay thousands of miles away from predatory payday loan lenders.
Several state governments have already banned payday loan practices. Others have brought strict payday loan laws which most of the lenders have no intention to adhere to.
Still, the number of storefront payday loan lenders is staggering in the country. The payday loan industry is ruling the country in spite of the best efforts of the country.
If you really want to know the real reasons behind the negative publicity of the payday loans, then please go through the following lines. You will come to know why you should try out other sources of taking out a loan instead of obtaining a payday loan online.
Give out personal information to illegal lenders
If you have taken payday loans through internet lending, you may have to fill out a form where you are required to give out your personal and banking account information. Not just that, you may also have to give out information on your social security number as well as your employer’s information.
Giving out your personal information may not be a very healthy practice to follow, especially to illegal lenders, since there are so many cases of identity theft reported by so many individuals.
May have to pay hidden fees
It is highly likely that you have to pay a fee to take out a payday loan. Usually, the lender adds a charge up for every $100 you borrow. The pdls usually have a fee of $15 - $25 for every $100 you borrow for a period of 14 days.
For example, if you borrow $1500, you may end up paying $375 extra as fees for the money lent within half a month.
So, you need to pay this fee over and above the interest rate. Therefore, like any other loans, you should carefully go through the documents while obtaining a payday loan.
Loans come with a triple digit interest rate
The cost of a payday loan can be 400% of the APR (Annual Interest Rate) and higher.
The interest rates on payday loans are incomparable. You cannot imagine how much interest rate a lender can charge on a one-month or one-week payday loan.
The maximum interest rates charged on the credit cards go up for about 30%.
Many consumers find it difficult to pay such high-interest rates to credit card companies.
Just imagine the plight of the consumers who have to pay nearly 300-400% interest rate on the payday loans.
So, if you have thought that credit card interest rates are high, then it is time to change your opinion. And, if you are not able to repay the loan within the said time period, calculate how much you have to pay on the interest.
The pdl lenders know their customers are those people who can't qualify for normal loans. They take advantage of this fact with full force.
Shorter loan term
Payday loan lenders do not allow borrowers to pay balloon installment payments during the loan term. Usually, the borrowers must pay the entire loan amount at the end of 14 days.
About 75% of payday loan borrowers can’t repay their loan within 14 days and are forced to continue it through loan "rollover" at extra cost.
Loan flipping: Payday lenders get most of their profits by giving multiple loans to cash-strapped borrowers. 90% of the payday industry's revenue is generated from the same borrower by generating more and larger loans.
Multiple borrowing: Many borrowers opt for multiple loans from multiple payday lenders to repay other debts. The result is no additional cash and just more renewal fees.
Costlier extended repayments: If you are unable to pay off your loan within the said time period, your payday loan can get costlier. This means that on top of the fee and the principal amount that you have to pay back, you also need to pay the interest. So, if you are opting for multiple extensions, you may get deep into debt and have trouble paying it back.
Lenders may drain your account
It is very easy to get into debt, but it is equally difficult to get out of it. You may not get rid of the debt even after paying the double or triple amount. The loan amount will keep on increasing day after day. The compounding interests will create a giant hole in your pocket.
It is very easy to get into debt
It is extremely easy to get into the vicious cycle of the payday loan trap. As has already been mentioned, the interest rates on the payday loans are very high. Most people are unable to come up with the money to clear these debts. As such they are more or less compelled to roll over these loans.
What happens is, you take out a payday loan and when you cannot repay, you obtain another one to pay back the previous one.
They either make arrangements to extend the due date or take out another new loan to repay the existing loan.
This situation continues and after a certain time, it becomes difficult to come out of the loop.
So, even though maximum people borrow payday loans for 1-2 weeks, then end up getting trapped for around 6-7 months.
It is very hard to get out of debt
Some of the payday loan lenders will give you a special benefit. They'll tell you that there is no need to send a check to them. They will withdraw the money directly from your checking account. You happily give them your banking details.
The real problem begins when the loan amount becomes so high that you struggle to meet your living expenses. You hardly have any amount in your checking account, but the lenders will not hesitate to withdraw it.
Your life will become hell from the day you realize that the loan amount is beyond your affordability. Payday loan lenders are accustomed to dealing with defaulters. Nearly, 10%-20% of the borrowers default on the loans. These borrowers face aggressive collection tactics.
The legal payday loan lenders will debit money from your account until the outstanding balance is completely paid off. If you don't have any more money in the account, then they'll file a lawsuit against you in the court.
Pdl lenders may threaten consumers
The pdl lenders have no consideration of the borrower's ability to repay. As already mentioned, the lenders may lend you the maximum amount allowed, regardless of your financial status.
If you fail to repay the loan, the lender will collect multiple renewal fees from you.
Aggressive collection practices have always been associated with payday loans. The payday loan companies often employ aggressive practices by threatening consumers to garnish wages if they're not able to pay back the loan amount on time.
However, if you experience such a situation, you can always file a complaint with the Federal Trade Commission or FTC.
Payday loans are illegal in some states
There is strict legislation to ban payday loans in some states. However, some lenders hide this information and pretend to be from some other state to offer high-interest payday loans. So, gather knowledge about whether or not a payday loan is legal in your state before you take out one. However, in case of an illegal payday loan, you’re supposed to pay back only the interest amount.
There are certain law regulations and limits to the amount you can borrow and is regulated by the attorney general’s office of your state.
Some states allow only $400 - $500 while others may allow more than that. There are payday loan laws specific to each state.
So, how can you manage your financial emergencies without resorting to payday loans?
Alternatives to payday loans
Here are some possible alternatives to payday loans:
a. Payment plan with creditors
If you are already following a payment plan, several creditors will approve regular partial payments. This plan will help you to pay off your bills over a long period.
b. Advances from employers
Some employers allow advance paychecks. As this is a true advance, not a loan, so, there are zero interest charges. Practically, this is cheaper than a payday loan.
c. Consumer credit counseling
A consumer credit counseling agency can help you to work out a debt repayment plan or develop a budget. These services are available at a very low cost.
d. Overdraft protection
A fee against a bounced check is greater than the fee you pay to a payday lender. So, a better alternative to a payday loan is to stop all the bounced check fees initially. Many banks provide checking accounts with overdraft protection facilities. For a little fee ($5 or lower), banks will protect a check by transferring money from the savings account.
Overdraft protection through a line of credit is also a good option, typically at 10% to 18% APR.
e. Credit union loans
Many credit unions provide small, short-term loans to their members at a cheaper rate than payday loans. Some credit unions also provide financial counseling totally free of cost and a savings plan, too. Many other credit unions offer very low-interest rate emergency loans (18% annual interest) with quick approval.
f. Cash advances on credit cards
Credit card cash advances are cheaper than a payday loan; normally these are provided at 30% APR. Secured credit cards may be another option for you. A secured credit card will be attached to a savings account. The funds deposited in the account 'secure' the amounts charged on the card. Once you have utilized the secured card for a certain period, you can qualify for a new regular unsecured credit card.
g. Military loans
Many companies offer military loans starting from $500 to $10,000. The main purpose of this loan is to provide financial support to active duty and retired military personnel. Payday loans are generally 10 to 13 times costlier than conventional small consumer loans. These loans have much lower APR, which is from 33% to 34.99%.
h. Small consumer loans
Small consumer finance companies provide small, short-term loans. These loans may cost you usually between 25% - 36% APR. These loans are also much cheaper than payday loans.
Perhaps the best way to avoid taking out a payday loan is to build an emergency cash reserve. The experts say to save about 5-6 months of your monthly expenses. If you do so, you can avoid taking out payday loans or alternative ways and can tackle the emergency on your own. Therefore, start depositing a certain amount every month to build your emergency fund. It will help you have a debt-free life!
However, if you're facing problems to repay your multiple payday loans and come out of the loop, don't worry. There's a way out. You can consolidate your multiple payday loans through a consolidation program. Doing so, you have to make a single monthly payment to the consolidation company towards paying back your multiple pdls. And, if you can't repay your payday loans in full, you can enroll in a settlement program and get rid of your pdls by paying less than what you owe. But, before choosing a debt relief option, make sure your pdls are legal; otherwise, you just have to pay the principal amount. The lenders can't sue you for non-payment on the accumulated interest. Therefore, check out your options, make a decision and, welcome a debt-free life.