Payday loans which are sometimes referred to as cash advances or check loans, are short-term loans at high interest rates, typically around $500 or less, that is due on your next payday along with fees.
These loans may be marketed as to help people to bridge the gap between their paychecks and unexpected expenses. But the Consumer Financial Protection Bureau says that payday loans can become “debt traps.”That is the reason, you should be cautious of payday loans.
The former president of United States of America Obama said, “If you lend out money, you have to first make sure that the borrower can afford to pay it back”.
President Obama gave above statement when The Consumer Financial Protection Bureau, a federal consumer watchdog group, just released plans to further regulate payday lending, a practice that’s viewed as predatory to consumers.
While payday loans are certainly popular, they are often criticized as charging exorbitant fees and interest rates, setting up borrowers to fail and setting them further back financially.
How does Payday Loans Work?
Payday loans are marketed with different name such as cash advance loans, deferred deposit loans, check advance loans or postdated check loans — but they typically work in the same way.
If someone is in financial crisis and needs cash fast before he get his next paycheck, whether for an emergency, to pay a bill, fix their car, buy groceries, or any other reason. They can apply for a payday loan. The lender verifies his employment, bank account, and documents some other information.
And then approves an immediate loan for a certain dollar amount. The borrower may need to write a postdated check made out to the lender that is dated for the same day when his paycheck comes.
Due date of loan payment is usually by your next payday, generally in two or four weeks. Many states allow payday loan lenders to cash your check and get loan paid off with accompanying fee charges. Different states allow lenders to charge from $10 to $30 for every $100 borrowed.
Why are payday loans bad? The Problems Related to Payday Loans
The Pew Charitable Trusts estimates that every year in the United States, about 12 million people borrow nearly $50 billion through payday loans. Majority of payday loan borrower are employed and of lower financial status.
In cash emergency people often opt for payday loans as it may provide instant cash you may need. But before applying you should be aware of payday loans problems.
High Annual Percentage Rates (APR)
If a person gets a two-week $500 loan that charges $15 in fees for every $100 he borrows. According to the CFPB, the Annual Percentage Rate of above mentioned loan will be almost 400 percent.
Payday loans also known as short-term loans as you typically need to repay a payday loan within two to four weeks of the initial loan.
You may have to pay additional fees on top of the initial loan fee if you don’t manage to pay back the loan within the short amount of time. According to CFPB, nearly a quarter of initial payday loans are re-borrowed nine times or more.
- Non-sufficient funds charges, if you don’t have enough money in your bank account at due date to repay your loan. Then additional charges will be add on top of the initial loan fee.
- If you do not repay
loanon time then you have to pay late fees or return payment fees.
- If you are unable to pay your loan on time and want to reschedule your loan’s due date. Then you will be charged with rollover fees on top of the original loan and initial fees.
Payday Loans Won’t Help to Build Credit
Short term payday loan lenders usually do not report your payment history to the credit bureaus. That is why; payday loan is not helping you build credit.
Target of Payday Lenders
People with limited financial education, weak credit, and in low-income areas are
Focus on to scrutinize people who are uneducated or desperate for credit. As these people don’t understand technical terms. So they give business to these lenders in form of higher interest rates and additional fee charges.
Why Are They So Disadvantageous?
Big difference between credit card and payday loan is finance charges. Although finance charges on payday loans run around 15-30% of the amount you borrow. First thought strike to mind as it is same as of expensive credit card finance charges. But it is not.
The reason is credit card interest rates are spread out over a whole year while payday loan charges are amassed in a very short time. APR of payday loans would be around 800% in some cases.
Generally borrower has to pay cost 35 times more than borrowing money on credit cards. If you borrow money for home mortgage or auto loans to then the loan can cost may up to 80 times.
Do People Take Out Payday Loan Once?
Researches show that taking out payday loan is a recurring pattern. The Consumer Financial Bureau Stated that 64% of payday loans is extended multiple times which result in fees that are more than the original loan amount.
Only 15% of easy to get payday loan borrowers to pay the loan on time within 14 days and rest of them take out six or more quick cash payday loans a year or rolled over their loan within just two weeks.
Is It Detrimental To Take Payday Loans More Than Once?
When you take out payday easy loan often, it starts building a trap that spirals their finances out of control. Overextended finances and more loans with high fees and interest rates make borrower spent a good amount of their checks once payday hits, and will find themselves short of cash again very quickly, taking out more loans. In this way, this stuff gets crazier.
Other Alternatives of Payday Loans
Financial advisers suggest that although payday advance loans seem like a quick fix. It is better to prefer other options such as; borrowing from a friend or family, asking your employer for an advance, or even taking out a cash advance or make purchases on a credit card.
If you are in a financial emergency and need cash now then payday loan seems the easy way out. But it may end up making your problem worse with their huge fees.
But no matter what you do, it is suggested to educate yourself about the risks and pitfalls of various loans. It is better to look for payday loans alternatives. Take help from credit counselors to develop a budget and work on starting a saving account.