Facts and Fiction in Payday Loan Industry |
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Payday loans are meant for those consumers who are in need of quick cash who can repay the loan within a short
period of time, such as in two weeks. Therefore, payday loans are known as short-term loans. Today, payday loan agencies are advertising everywhere-in newspapers, radio, television, and Internet, even in direct mail. Payday loans are known by different names like cash advance loans, check advance loans, post-dated check loans and deferred deposit check loans. These loans demand very high interest rate from borrowers. These loans are quickly accessible but not as easy to handle as a standard loan. In payday loans, consumers give the credit outlet/agencies a post-dated personal check in return for cash on the spot. (A post-dated check is dated with a future date. The check is not negotiable until the date becomes current.) Loan amounts vary but a typical amount would be $150 to $200. The service fee for the loan is about 15% (or higher) of the loan amount. For example: if the loan amount were $400, the service fee would be $60. The loan period can also vary but a typical length is two weeks. Consumers who are likely to use these credit outlets need to be currently employed, have incomes of $30,000 or more. Payday loans are easy to access because lenders do not examine your credit status as minutely as it is done in case of a standard loan. Payday loans are targeted to people in financial trouble so there are few borrowers who can pay off their loan at that point (within the stipulated two weeks). Research has proved that borrowers, on an average, receive 8 to 13 payday loans per year from a single payday outlet. But it's always difficult to stick to only one outlet, as the interest rates are very high. Therefore, borrowers often go to more than one outlet (1.7 on an average) and takes out 14 to 22 loans per year. In fact, most borrowers end up paying consecutive fees for no new money. To be precise, only 1% of all payday loans go to onetime emergency borrowers who pay their loan within two weeks and don't borrow again within a year. One myth that hangs around payday loans is that these loans are cheaper than bounced check charges and other alternatives. But in reality, payday loans are much more costly like that of a credit card late fee. Payday lenders claim they are the only option for debt-strapped consumers. But borrowing more money at triple-digit interest rates is never the right solution for people in debt. Instead, payday loans make problems worse. In fact, because most consumers believe they could be prosecuted for passing a bad check, the payday loan suddenly becomes their priority debt. Thus, the original debt problems that brought them to the lender often can't be resolved Theoretically, payday loans may sound good or attractive, but practically, they aren't for every consumer. If you are in immediate and temporary financial crisis without any other possible source of funds and you think you can cover a postdated check, payday loans may be a good deal for you. But for the vast majority of payday borrowers, payday loans turn into chronic debts, instead of helpful credit. Even these loans are worse than late fees and bounced check charges While late fees and bounced check charges are onetime fees and do not vary by loan amount, payday renewal fees are charged repeatedly. Therefore, think twice before you apply for payday loans. Payday loans are dangerous not only because they dent you with high interest rates but also because they lower your creditworthiness for other standard loans. Consult with your friends and financial wizards about the nooks and corners of these loans and then only take a decision. |
