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Why You Should Watch Out For Payday Loans?

by Amarachukwu
Why You Should Watch Out For Payday Loans?

There are so many factors that indicate financial insecurity in society. From a high rate of abandoned apartments to shopping centres that are left unoccupied. But, another factor that is being conveniently ignored is the continual increase in the consumption of payday loans products.

It may camouflage as rendering the needed financial assistance to consumers, but when it becomes too much, it points to the fact that a lot is wrong with the people’s finances. It says that they are cash-strapped and don’t mind paying exorbitant interests in return for a small personal loan AKA payday loans.

Pew Charitable Trusts in a report reveals that a whopping 12 million Americans request payday loans annually and spend about $7 billion in 12 calendar months on loan fees. The interest rates are usually called fees and most times, range between 300%-500% annual percentage rate (APR).

When you compare the APR of payday loans to that of credit cards that range between 15%-30% APR, or personal loans from banks and credit unions that are at 10%-25% APR, you will agree that the difference is quite clear and wonder why would anyone prefer payday loans when there are better alternatives.

Pew also emphasizes that majority of the consumers of payday loan products are mainstream workers that earn nothing less than $30,000 annually. Providers of payday loans also target customers that are financially strapped. People who are not qualified for credit cards or have poor credit limits, usually as a result of financial crises in the past.

While consumers that qualify for credit cards are at liberty to use their credit cards to finance their immediate needs, those that aren’t lucky enough have no choice but to turn to payday loan lenders to source funds to pay for immediate necessities like their rent and utilities. Unfortunately, these ‘solutions’ come at high-interest rates that usually bite deeper into their finances and is capable of leaving them in a worse shape.

Why You Should Watch Out For Payday Loans?

What are payday loans?

A payday loan is an unsecured cash advance given to consumers that are cash-strapped. The loan is usually in small amounts (less than $1,000) but is characterised by a huge interest rate and a short-term repayment expectation. Often times when consumers approach lenders for a payday loan, they are meant to finance essentials like food, rent, medicals, or utilities. Even though the name payday loan suggests that the product is available to salary earners with a steady paycheck, lenders offer the same services to other interested consumers that they are certain would pay back in a short period. The lifespan of a payday loan is relatively small when compared to other personal loans.

Payday loan lenders in the United States are also known to operate in low-income earning neighbourhoods from their storefronts. This is because most of their consumers are poor people with poor credit scores and no other alternative to source the money they need to cover their urgent bills. Despite the vulnerability of their customers, payday loan lenders can charge as high as 400% APR on their loans.

Although, it is equally believed that the charges are that high as a result of the fact that most people that need a payday loan are high-risk customers. So, the lenders are trying to play safe. However, states across the United States have started regulating the interest rates on payday loans, and this has made some lenders vacate from those states where they can’t abide by the rules.

Who are the consumers of Payday loans?

The Community Financial Services Association of America (CFSA) confirms that there exist approximately 18,600 payday loan locations across the United States. These lenders have also given out loans that worth about $38.5 billion to 19 million households nationwide.

If this stat reveals anything, it is the fact that the payday loans product is widely sought after, especially by people that have little or no access to conventional credit options.  The simplicity of the process and easy liquidity have also endeared payday loans to consumers.

Operators of payday loans also enjoy the patronage of revisiting customers who after paying older debts, usually come back for more. This is despite the exorbitant charges, difficult repayment plans and the few regulations that they work with- especially in many states.

Lenders also leverage traditional media like the newspaper, TV and radio as well as online platforms to roll out Ad messages about their services, trying to woo as many people as possible about the ‘juicy offers’ that they have for them.

They offer cash advance loans, deferred deposit loans and check-advance loans with little or no emphasis on customers’ credit history. This makes their loans very easy to get, although, at a very high-interest rate.

In a 2014 report by the Consumer Financial Protection Bureau (CFPB), it was revealed that most payday loan borrowers often come back for more loans and end up paying more than they borrowed. The report added that the average borrower spends about $520 as charges for borrowing $375.

The recent regulation across states has clamped down on these charges and has affected the operations of lenders of payday loans. This has also increased the requests for credit cards in recent times.

What is the real cost of payday loans?

More often than not, cash-strapped borrowers struggle to pay up their debts. Whenever they have difficulties with the repayment of their payday loan for whatever reason, they usually go back to the lenders to explain their situation and inability to pay back as agreed. Ironically, this is a confession that lenders love to hear. Whenever this occurs, they offer an extension to the borrower. this extension is also referred to as a roll-over. This roll-over gives the borrower more time to pay back on the condition that they must pay another fee for the extension. This is a blessing in disguise to the lender.

If for example, you borrow $100 with an agreement to pay back $130 in a month’s time, if you are unable to make the refund by the end of the month as agreed, the lender may decide to add another 30% interest for every month that the money stays with you. If by the sixth month you are still unable to pay, you’d discover that you would be in debt of $180 (that’s interest alone) and the principal of $100, totalling $280. This is how borrowers get caught in a debt cycle with little or no hope of escape. It is so bad that some take another payday loan from another lender to settle older ones.

Why you should avoid payday loans

  • They are expensive. While credit card loans that are regarded as high-interest charge borrowers an average of 28%-30% APR, the average payday loan’s APR is above 300%. Considering the class of the members of the society that patronize them, this is too expensive. Even people with steadier incomes, better credit scores and relatively richer than the class of people that approach payday loan lenders for assistance won’t settle for such terms.
  • Payday loans make it easy to sink deeper into more debts. You can call them a financial quicksand. They appear like they offering borrowers an escape route from their financial challenges. But they may increase the borrower’s financial problems.

This is because, the 2 weeks repayment plan don’t usually work for all borrowers and as far as they cannot repay, they have to go back to the lenders for a roll-over. This increases the debt rate and if they don’t watch out for it, they’ll be neck-deep in debt before they know it.

  • The procedure for borrowing is too easy. Yes, this is not a good sign. The relative ease of acquiring a payday loan is more or less, a problem than a solution. It tells you how unreliable the system is. Unlike the bank or other credit givers that requires extensive documentation, the payday loan requires that you walk into the lender’s store, sign some papers, write a check and have the money given to you.

Also, unlike other forms of credit, you can’t change your mind the moment you sign those papers and have been given the money since they don’t usually contain a right of recession.

  • Some lenders may ask for access rights to your bank account. They may try to convince you by telling you that it is an alternative to writing post-dated checks as widely used. However, if your account is not funded as at the due period, they may repeatedly attempt to withdraw from it, costing you the charge for multiple overdrafts. This can go as high as $35 or more. Remember, that does not mean you won’t pay back the loan in full- principal and interests inclusive.
  • Payday loan lenders can be ruthless to borrowers. They may not play by the book or be professional like the banks and other traditional financial institutions may be. The moment you are late for the payment, they can employ any tactic to stress you until you pay up in full- including calling you at odd hours. And in such a period, your mental health may become a mess.
  • Payday loans can mess your credit report up. While it is true that they don’t require a good credit score to lend you some money, it is best that you are able to pay it back almost immediately (on or before the due date).

This is as a result of the fact that they usually ask for a post-dated check. Therefore, if on the agreed date, your account is short of cash and they can’t cash the check, it reflects in your credit history. Trust these lenders, they will try presenting the check multiple times. And for every time that the check bounces, your account is charged and your credit report picks the activity up. Eventually, it is capable of throwing it into a mess.

Alternatively, you can contact the lender before the due date that they should not present the check since you know that it will bounce and ask for another payment plan. This may attract more charges from the lender, but at least, they wouldn’t have to present a check that is bound to bounce at the bank.

  • Lenders of payday loans prey on the poor. The majority of the consumers of payday loans are poor people and lenders have taken advantage of their desperation and volatility to take advantage of them.

Some of the characteristics of the majority of the borrowers are that they are young, have children, are high school graduates, do not own their home, rely on social security checks, and have no access to any other form of credit. They usually have at least, one of the aforementioned characteristics. These characteristics also place them at a disadvantage in society.

Substitutes to payday loans

  • Credit unions. Credit unions or small loan organizations are nice places to source credits. Many people have gotten financial assistance from credit unions in their locality. Even though they may insist on a double-digit interest rate, they are usually lesser than those offered by payday loan lenders.
  • Talk to financial advisors. Before committing yourself to a payday loan lender, approach financial advisors for counselling. There are financial advisors in non-profit agencies across the country that offer financial literacy at a little or no cost. If you have challenges getting them physically, you can search for them online.
  • Develop a budget and stick to it. you already know that what you earn isn’t much. Therefore, prepare a working budget that aligns with your earning. Ensure that the budget captures your essentials and eliminate the expenses that you can do without. That way, you’ll be able to manage your finances better, build your credits and be qualified for a better credit source at competitive rates in the future. It is better you inconvenience yourself now and secure your future than the reverse being the case.

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