In the past decade or so, there has been a lot of advertising on short-term cash solutions and you may have noticed countless “Payday Lenders” pop up in almost every neighborhood strip mall. Nowadays, there are more payday lenders across the United States than McDonald’s. In the last couple of years, the government and consumers have come down hard on this $40 billion-a-year industry, accusing them of loan sharking and lending fraud. As a result, the payday lending industry is currently facing high regulations and low consumer confidence.
How They Operate
Almost all payday lenders operate in a similar method that is both highly effective and profitable. Most often, the borrower writes a personal check payable to the payday lender for the amount they wish to borrow, plus any additional fees. The date on the personal check reflects the borrower’s next pay date or a future date specified by the borrower. The borrowing fees typically range from $15 to $30 for every $100 borrowed, for every two weeks.
When repaying the loan, the borrower usually has three options. First, the borrower can let the payday lender deposit the personal check on the agreed date. The second option is to reimburse the payday lender the loan amount and the fees on the due date. Finally, the borrower has the option to roll over the loan and its associated fees until next the payday.
Benefits to the Customers
These short-term loans are ideal for consumers who are constantly late on their payments and need the extra cash to avoid bounced check fees and other late penalties. Since many of these payday lenders do not require a credit check, it is much more convenient for customers to obtain payday loans when compared to other conventional loans. Payday loans can also assist customers to maintain a healthy credit report and score. By paying the bills from the borrowed cash, the customers can avoid black marks on their credit report that result from late payments.
Risks of Obtaining Payday Loans
Customers who obtain payday loans can expect high interest charges. Credit experts estimate that an average payday loan can cost up to ten times as much as a personal loan. Interest charges calculated at an annual percentage rate (APR) usually falls in between 300% to 500% and may even rise up to 1,000%.
Most people who are in dire financial crisis often fail to repay their payday loans on the agreed date and end up renewing their loan in the hope of paying it off in the coming weeks. This method tends to yield disastrous results as most often customers get trapped in an endless cycle of debt.
Customers who bounce their payday loan checks can expect to pay high ‘bounced check fees’ from both the payday lender and the bank. This often leads to additional financial woes for the customer.
Alternatives to Payday loans
High interest payday loans should only be considered as the last possible option. If money is hard to come by and you are faced with temporary financial set backs, contact your creditors and explain your situation to them. Most creditors will temporarily reduce your interest charges and may even cancel your outstanding late fees and other charges.
If your credit is somewhat reasonable, obtain a short-term loan from a credit union or your local bank. If you are unable to secure a loan and have ample available balance in your credit card, try taking a cash advance. Keep in mind that cash advances do not fall under regular purchases and usually comes with hefty interest charges and fees.
Customers who often fall behind on their payments should obtain professional assistance from personal finance experts. Non-profit credit counseling companies such as CreditGUARD of America are created to provide these services to consumers who are currently experiencing high debt and interest charges. Credit counseling companies can reduce or even eliminate debt and interest charges and can consolidate all your debt into a one low monthly payment.