Sometimes, consumers find themselves in need of immediate cash. Usually, the need is of an emergency nature such as a car repair, health emergency or other incidents that defy planning for. For some the need is great and resources for help are scarce. So, a consumer enters into the bizarre world of payday loans.
A payday loan is quick and easy to get: Just prove that you have a job and an upcoming payday and the money is yours. But at what price?
Payday loans are costly loans
Interest rates for these loans can top 300 percent. Compare that to the outrageous interest rates on credit card cash advances with rates often topping 25 percent. Those cash advances are often a better alternative than a payday loan.
How do payday loans work?
A payday loan is for a short term, usually two weeks or less. You borrow a small amount, normally $500 or less, and promise to pay it back when you get your next paycheck. Assume you borrow $100. When you pay off your loan you give the loan company $115. That sounds acceptable until you realize that your annual interest rate for the payday loan is nearly 400 percent.
What happens if I fail to pay?
As a group, payday lenders have a well-earned reputation as predatory lenders. According to the Federal Deposit Insurance Corporation, a predatory lender is one that uses “imposing unfair and abusive loan terms on borrowers.” It should come as no surprise that their collection techniques are worse. Some companies pose as agents of law enforcement and threaten you with an arrest if you don’t pay up. They may say they will levy criminal fraud charges against you. Often, people who have paid up are still harassed and threatened so they will pay again. This is because payday lenders sell their “unpaid debts” to other organizations who try to collect. This happens so many times that a single debt may go through as many as five different buyers.
Help for payday loan borrowers is on the way
The Consumer Financial Protection Board was created shortly after President Barack Obama’s inauguration in 2009. It is an agency that supervises and regulates banks and other lenders in the United States. Shortly after its creation, it began receiving an astonishing number of complaints about the predatory practices of companies that make payday loans and “auto title” loans. The CFPB believes that American consumers are entrapped by payday lenders, auto title lenders and other short-term lenders. So, they created a set of rules to regulate the industry so it’s fairer for consumers. Included in the proposal:
1. Short-term lenders will be required to determine whether a consumer can pay the loan back.
2. The rules would curb repeated debit attempts to borrowers’ bank accounts that frequently cause bank charges. Sometimes, the total for the unpaid debit fees exceed the original loan amount.
Look for an alternative to a payday loan so you don’t wreck your credit rating. You can talk with others you owe money to and see if they will wait for your payment until you are paid. If you are a homeowner an equity loan may help. If you have credit card debt, contact those creditors and request a lower interest rate..
Finally, don’t rule out filing for bankruptcy if your debt is unmanageable. An experienced bankruptcy attorney can guide you through your options and help you determine whether it’s the right move for your situation. Yes, your credit will take a hit, and it’s not a short road to financial recovery. But it will release you from the stressful, costly cycle of living from one payday loan to the next.