The payday loan is a small and short-term loan that generally intends to cover expenses until the next payday so you get the money you need to get you out of the financial hole but only momentarily; in fact, the payday loan is sometimes referred to as cash advance and is different from the concept of loan consolidation, and far from it.
Payday loans are now a much debated argument and a lot has been written about them, even very recently. The latest attempt to curb payday lending in some US states hit an early obstacle when some state legislative committees voted t to reject proposals that would prohibit lenders from charging fees that would boost borrowers' cost. No wonder there: this industry is growing very rapidly indicating that the business model is highly profitable and, in addition, finance companies involved in this business have contributed several million dollars over the years to various state legislators... So I guess we have to do with payday loans: nevertheless, the real question that everybody should be asking, especially those who, even if they wish otherwise, could not do without such a loan type, is this:
Are there alternatives to (expensive) payday loans?
Unfortunately, it is often the only loan available to consumers with bad credit or who cannot find a bank willing to loan to them (or that cannot find a credit card, or other lower-interest rate alternative). On the other hand, it should be noted that most borrowers may find themselves in a position that is worse off when the loan is due than they were when they took it on; many borrowers may incur in a vicious cycle and can get trapped in a cycle of debt.
So what is the solution to this conundrum?
For one thing it is important to know the facts and figures so to be able to judge independently what is being advertised, how is being packaged and why (or not) is being offered in a certain way. A typical payday loan can be between $100 and $1500, on a two-week period and have very high interest rates, usually in the range of 380% to 900% yearly (although most of the US states have usury laws that forbid interest rates in excess of a certain Annual Percentage Rate or APR).
Nevertheless, this has not stopped payday lenders who have in fact succeeded in getting around usury laws in some states by forming relationships with banks registered in a different state with no usury ceiling (and this is the case of states such as South Dakota or Delaware). In Canada the situation of payday loan may be different: according to Canadian law, any rate of interest above 60% per year is considered criminal. This in turns limits can limit the practice of payday loan in Canada. And remember to be careful also if you are considering other completely different loans such as student loans... but this is another story, and another article!
In conclusion, payday loan practice, although legal and regulated in 37 states, is still controversial, sometimes with bad public perception, and it is facing legal battles in nearly every US state and, as we saw, in Canada as well: so be careful when (and if) you wish to go the way of a payday loan!
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