Payday lenders are falling under an increasing pressure because they are supposedly preying on vulnerable borrowers. There is a controversy today when it comes to the products that they are offering. Are you really aware of what payday loans are?
An online payday loan is supposed to give a consumer access to a quick source of cash. It is meant to resolve sudden financial emergencies that cannot be met by the usual source of income of the borrower. Payday lenders used to operate solely from storefronts but they have since gone online and this makes it even easier for borrowers to get loans from them.
Those who support payday loans say that it serves real necessity. It fills an empty space when it comes to financial products available in the market. It caters to borrowers who are unable to qualify for loans from banks and other financial institutions. Without the payday loan industry, those borrowers would have nowhere to turn to when in quick need of cash.
The detractors of payday loans on the other hand claim that this kind of loan can do more harm than good. Instead of helping borrowers to get out of financial trouble, payday loans only lead them to even more trouble.
The Terms for Payday Loans
There might come a time in the future when you would look at a payday loan as a valid option for you to get cash quickly. Should that time come, it would be more than a bit useful to know more than just a little about cash advance loans.
Payday loans can range from on hundred to a thousand dollars. In some places the amount that can be borrowed is set by the state law, but for the most part it is only a loan for small amounts. On the average, the term for a payday loan lasts for two weeks to a month. Typically, lenders would charge around $10 to $30 for every $100 borrowed. That would translate to an APR that could range from 300% to 800%.
When you compare the cost of a payday loan with other financial products, you would notice right away the abnormally high cost of this type of credit. Getting a cash advance from your credit card could have an APR of 57% plus the charge for the service. Some people consider that to be very expensive, but compared to what a payday loan could potentially cost, that’s not much.
The Easy Requirements for Payday Loans
If payday loans are outrageously expensive then why is it that people keep on borrowing from payday lenders? Why is it that there are 12 million consumers willing to shoulder the cost of payday loans every year?
Part of the reason why people still use payday loans, though its cost is very high, is because it is so easy to get one. Lenders require that borrowers should have a bank account, a source of income and an ID. With those three basic requirements, a borrower can get cash at no time at all. Lenders don’t run comprehensive credit checks which are what banks do and they don’t really go out of their way to find out if a consumer can repay a loan amount.
In most states, lenders do not require borrowers to submit or fax in documents. Since the whole application process can be done through the internet, the whole thing can be accomplished quickly. In the past, payday lenders operated though store fronts, but the number of payday loan stores is declining nowadays and more of these companies are making the switch and are going online. The introduction of the internet has affected both the lenders and the borrowers of payday loans.
Is Payday Lending Legal?
The predatory nature of payday loans would make you think that some kind of law has been enacted to control it. Federal law prohibits lending to members of the military and their families under harsh terms, but for the rest of the consumers, it is silent. State laws are the ones that regulate payday lending in America. This means that there is a vast difference between what is allowed in one state and what is prohibited.
In most of the states, the high cost payday lending that we have just described is allowed by law. In eighteen states plus the District of Columbia, the state governments have placed caps on the interest that can be charged by the lenders.
Even though there are laws in place in some states which aim to regulate payday lending, some lenders still manage to evade the control that is being imposed by state governments. They use several tactics in order to accomplish this evasion. They use transactions to cover up the fact that what they are giving out are payday loans. In some cases, some small banks located in states where payday loans are regulated, are renting out their charters to payday lenders. Other lenders restructure their products as instalments so they can avoid being under the regulations of payday lending. But even if they change the name of these loans, these are still payday loans and the cost is still the same.
The Risk of Online Loans
Users of payday loans are risking being caught in a debt trap. A debt trap is when a borrower is forced to take out loans in order to make ends meet. Cash advance loans increase this risk because its cost is very high and most of the people who use it have limited income. They are not really suited to handle very expensive loans at all.
The use of the internet for payday loans is also risky in terms of security. The lender is forced to disclose his personal information through the internet. That information is very sensitive and can be used for fraud and identity theft. So even when a borrower is applying for a loan from a legitimate lender the security risk is very real. There are also some unscrupulous lenders that structure the loans so that it would be renewed every month. Since they have the bank account information of the borrower, they can do that without the borrower’s consent. Although a consumer has a right to cancel such transactions, in reality most consumers have a hard time cancelling transactions through their banks.
Payday Lenders Preying on the Poor
Though payday lenders will never agree to it, they are actually preying on the poor. According to statistics, most of those who use payday loans have small income or are relying on benefits. There is no way that they can afford the high cost of the loan. They are forced to renew the loan which would mean additional charges. In the state of California alone, half of the revenues of payday lenders come from borrowers who have six or more loans per year. That just means the payday lenders are getting most of their money from the people who could hardly afford it.
All of these things should serve as food for thought for you if you are considering using payday loans. You wouldn’t want to have a hard time paying back what you have borrowed just like those consumers that we have described. Consider alternatives first. And always read the loan contract carefully before signing it.