The Vicious Cycle That Are Payday Loans |
|
Payday loans are often called a debt trap by regulators, because it can trap consumers already in need of cash in a never-ending cycle of debt. Their exorbitant interest rates, of at least $15.00 for each $ 100.00 borrowed, plus their short duration could result in APRs anywhere between 400-1000%. There is also the risk that if consumers roll the payday loans over multiple times, they could end up
paying more in fees, than they actually borrowed. But the payday loan industry is quick to argue that they provide a useful service. It is true that they provide a segment of the population, quick access to cash on a short-term loan basis. But it has a lot of hidden risks and disadvantageous. The Payday loans are marketed as one time assistance loans. However, a recent study shows that 91% of all payday loans are made to borrowers with five or more payday loans per year. Thus the statement, one time assistance is just a lot of hot air. They are extremely easy to get and need almost no processing time. Consumers can go to the store providing these loans with nothing more than a checkbook and get payday loans. When you take out a pay day loan, you are basically borrowing money against future paychecks. Thus, a consumer who wants to take out a $300 loan will usually write a check for an amount, anywhere from $325-$345, to the lender. The consumer is, then given $300 cash and the lender retains a post-dated check. The consumer can either come back to the establishment with $345 in hand to get the check back, or just allow the company to put the check through the consumer's bank account. The problem arises when consumers are unable to pay back the entire loan in the week or two in which it is due. Unlike the traditional method of paying back loans in installments, payday loans, must be paid back in one lump sum; they must pay back the entire loan at one go. If he is unable to do so, he usually resorts to what is called loan flipping. This is the practice of taking out another payday loan to cover the original one. The consumer pays an additional $45 in fees for the next loan. But since he was unable to make the first payment, he doesn't receive any cash. Instead this new loan goes to pay the earlier one. The principal, however, goes unpaid. This can lead to a vicious cycle of debt in which the consumer continues to pay fees but the principal is never paid off. In the end, consumers will go to other establishments for payday loans to pay off the original lenders. This cycle often ends in consumers turning to family, friends, or even church to help them pay off these payday loans for good. Payday loans can result in a crushing, never-ending debt cycle for borrowers. This cycle will prevent them from ever getting ahead, financially. However, there are some steps consumers can take to regain control. Financial experts offer the following tips: Before you decide to take out payday loans, make sure you know what you are getting into. For example, you may think the loan is very private, because the payday lender may not ask what the loan is for or get a credit report. However, you will be asked to provide a pay stub, bank statement, driver's license and telephone bill. This works as a reporting service to screen out high-risk check writers. Another thing is to make sure that you are not lulled into a sense of false security. They are most often victims of their own wishful thinking. If they don't have enough money in their checking accounts to pay for something, they take out payday loans in the hope that they will have enough money to pay back the loan by next payday. Take out payday loans only if you are certain that you will have the money to make the repayment by the next paycheck. Only in such cases can payday loans work as a temporary solution to your cash shortage. But if you are at all concerned that you will have trouble coming up with the money next week or the week after, you are better off avoiding payday loans altogether. Also, it is a crime to write a check when you know that there are not sufficient funds to cover it. So, if you give a post-dated check to a payday loan agency, but don't have the money to cover the check when it's due, the loan agency can press criminal charges against you. Is your need worth the risk of criminal prosecution? Also, many payday loan agencies use this threat to pressurize customers into rolling over payday loans again and again. The best way to escape this vicious cycle of payday loans is to avoid them altogether. This is possible through the habit of saving. Try to put something aside, even if it's only a few dollars, every week. Then, eventually you will have an emergency fund that you can depend on for unexpected expenses. |
