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The Hidden Risks in Payday Loans |
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Payday loans are marketed as a quick and easy way to get cash. Their requirements are minimal. The consumers need to maintain a personal checking account, should be able to show a pay stub and bank statement and be employed only for a specified period with their current employer. Credit checks or other inquiries, mandatory for other loans, about ability to repay, are also not routinely done. But do customers understand the risks of payday loans? They go into it, the first time, not really understanding what it is and not bothering to ask themselves how they're going to pay it off. By the time they do, it's too late and they are trapped. Because, the industry frequently uses the term payday advance instead of payday loans, many customers do not understand that they are engaging in a credit transaction. Most of them don't realize that they're taking out a loan, not just getting an advance on their paycheck. Nor are they likely to know and understand the legal side to the whole matter, what the law either provides for or doesn't allow if they are unable to complete their credit transaction with a timely payment. Generally, consumers who default on a loan are not committing a crime. However, payday loans are secured by a post-dated personal check, which the lender agrees to hold until the customer's pay is deposited. This is a crime. States consider it illegal to write a check, when you know that there are not enough funds to cover it in your account. So, they could be exposing themselves to the threat of criminal prosecution by their lender. Customers also may not know that, in some cases, they're granting the payday loans lender, the right to electronically debit their checking account to cover fees and interest payments. They don't have to do this. In fact, the Electronic Funds Transfer Act prohibits making electronic access to an account a condition of granting credit. Also, any customer can call, at any time during the process and tell the lender to stop electronic debits. But very few are aware of their rights. Lenders prefer to keep it a secret for their own advantage. Some payday lenders also require borrowers to sign a mandatory arbitration for payment disputes document. However, most people that were approached for this survey agreed, that most of them did not know what they were agreeing to. Nor are they likely to know that their paychecks could actually be garnished if they don't make the payday loans payment. This is, because most people think of garnishment as related to child support. In a recent survey conducted, it was found that most payday loan agencies frequently engaged in unfair and illegal collection tactics. They subject the payday loans customer to horrific collection practices that are not imposed on consumers defaulting on traditional forms of credit. There have been complaints of harassment of the customers, their employers, friends and family, threats of violence against defaulters, collection of excessive damage charges, and threatening the defaulters with criminal prosecution are some of the inappropriate collection practices. As a result, the payday loans industry has developed a set of Best Practices, one of which states that the lender will collect debts in a fair and lawful manner. But as the survey states, it is still unfair to collect treble the damages allowed in some states from defaulters. Since payday lenders do not assess the customer's ability to repay the payday loans and also since they know that the post-dated checks given to them are not good, payday loans agencies can hardly be classified as victims of crime, entitled to treble the damages. To really understand why payday loans can be a bad thing you must first understand a few basic principals of lending. There are prime lenders, huge financial institutions that loan money to people who are not considered great risks. Those people have good credit histories, steady employment and collateral. As a result, they get the best interest rates. Unfortunately, many Payday loan customers do not fit into this category. In California, for example, where there are more payday lending outlets than McDonald's or Burger King Restaurants, the average payday lending customer takes out 11 payday loans a year. And for this privilege, payday loan customers pay interest, that nationally averages, an annual percentage rate (APR) of 474%, making it difficult to repay. Thus, rollovers which occur when a borrower can't repay a loan and thus renews it for another one with additional fees, can lead to a vicious cycle of perpetual debt. |
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