It is no secret that these are difficult economic times. Many people facing financial hardship are living paycheck to paycheck and having extreme trouble making ends meet. Worse, some people are unemployed and many more are under-employed. With rising debt, unpaid bills and increasing financial distress, credit is scarce so people are seeking alternatives to traditional lending.
Payday loans seem to be the quick and easy solution for many. These payday loans are often a source of easy and immediate money, but are they worth the incredible risk?
What is a Payday Loan?
Essentially a payday loan is a short-term, small loan that will either be paid back on the borrower's next payday or will be deferred for a fee. The loan (or the deferment) is typically paid back in one of two ways. Either by providing a post-dated check to the lender or by allowing an automatic debit from the borrower's bank account.
Unlike traditional lending, there are really no credit requirements that a borrower must pass to secure a payday loan. If there is income and a bank account, a borrower will most likely be approved. A credit check is typically not required as the lender, through direct access to the bank account, is essentially guaranteed payment.
In many cases, a payday lender will not even need the borrowers name to provide the loan.
So Tempting but so Dangerous
It's the end of the month and rent is due. Gas prices seem to be ascending perpetually. Food, clothing, utilities and all the other monthly bills are adding up. A small influx of cash would make all the difference.
Because payday loans are so easy to obtain and the loan amounts are usually so low, they are extremely tempting. Most people utilizing these loans are already having trouble making ends meet so these loans perpetuate a vicious cycle.
One look at the financing fees associated with these loans and it is easy to see why they are so perilous. Payday loans carry outlandish financing charges that could be as high as 30 percent. A loan of $200, if paid back on time becomes $260. Even a finance charge of 15 percent annualized ends up being a 400 percent annual percentage rate. This is not out of a Sopranos episode, this is real life lending.
Problems arise because many borrowers cannot afford to repay their loans on the following payday. This will cause them to incur added finance charges or worse, rollover fees. This is where the snowball can truly avalanche.
Payday lending is actually outlawed in some states, including New York. Unfortunately, borrowers can get these loans online from offshore lenders with no contact information. The financial dangers have been discussed. Regrettably, this also opens a borrower up to identity theft by transferring sensitive personal data to unscrupulous lenders.
Alternatives to Payday Loans
Financial distress can cause desperation, but this is the time to buckle down and make wise financial decisions. Payday loans are almost never a good idea.
Depending on the creditor, many will be willing to work with you to extend your payment terms. Late fees are almost always going to be less than the finance charges associated with payday loans. Falling behind may be a better alternative.
Additionally, some credit unions and banks offer short term loans similar to payday loans with much more favorable terms. Also, many people experience shame, but if you are having financial difficulty, it may be time to swallow that pride and seek help from family and friends. Their repayment terms will undoubtedly beat those of any payday loan.
Tread Carefully
While one may feel that they have no other choice, it is wise to think long and hard before taking a payday loan. If it is the only option, shop for the loan with the lowest fees and penalties to minimize the potential damage. Pay in full when repayment is due and make sure funds are available in the bank account to avoid bounced payments.
Ultimately, a borrower has options and rights including the protection of the Federal and State Governments. If there is the appearance of fraud, a borrower can enlist the help of the Federal Trade Commission, State Attorney General and Better Business Bureau.
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