Why You Should Avoid Payday Loans
Why You Should Avoid Payday Loans
The lure of payday loans can be too much for some people. These loans offer fast cash to people who are feeling a budgetary pinch and need money to get them through a rough patch. Most of us have struggled at one time or another between paychecks, when an unexpected emergency occurred a few days or weeks before payday. A payday loan can get you cash immediately while you wait for your next paycheck.
Unfortunately, as convenient as they seem, payday loans are risky and can get you into a great deal of financial trouble.
Why should you avoid payday loans?
Payday lenders have a reputation for being the bad guys of the credit and lending industry. They are known for lending money to desperate customers at high rates. They also have a reputation for misleading consumers and preying on those who are most vulnerable.
Of course, they claim they are providing a much-needed service and helping people through difficult times, but they are benefitting from this financial desperation and encouraging people to make a bad situation worse.
Payday Loan Terms
One of the main reasons you should avoid payday loans is because the terms are so unfavorable. On average, payday loans charge about $15 to $20 per $100 borrowed. When money is tight and you need $100 or $200 to get you through a tight time, this doesn’t seem so bad. After all, $20 is a small price to pay to repair your vehicle or deal with a late bill. And considering many credit cards have interest rates at least this high, if not higher, a payday loan might seem like a good option.
But there’s a catch.
In most cases, this fairly reasonably term of 15% to 20% is for a very limited time. Many payday lenders give you only about two weeks to repay all of the money you borrow. At that point, you’re charged an additional 15% to 20% of the loan total.
So borrowing $100 for more than two weeks ends up costing you $30 or $40. And if 30 days pass, you’re charged an additional $30 to $40. It just keeps adding up – and adding up fast – and before you know it you owe more in interest than you originally borrowed.
Suddenly a generous 15% interest rate balloons to 140% or more in just a few weeks. Struggling to repay a payday loan for a few months could result in 400% to 500% interest.
Even the worst credit cards available top out at about 35% to 40% APR!
Qualifications to Borrow from a Payday Lender
As bad as the interest rates are for payday loans, rates aren’t the only reason you shouldn’t consider this type of loan.
Typical lenders have strict requirements for lending. Your credit history is reviewed and a variety of factors are taken into account before credit card companies, mortgage lenders, and others will lend you money.
This usually isn’t the case for payday lenders, though. They are very lenient with their requirements and in some cases, all you’ll need is an ID and to show proof you are currently employed when you apply for a payday loan. Some require a bank account and a post-dated check so they are able to access your checking account. Just about anyone can apply, even if their credit history is abysmal and their financial situation is otherwise tenuous.
Payday lenders are looking to lock as many people as possible into their predatory loans. They intentionally lend to risky borrowers because they know it will be worth it to their bottom line.
Payday loan companies earn billions of dollars each year in revenue. They market themselves as helpful and as a service to those in desperate situations, but their number one concern is their profit. And they will do anything they can to guarantee a profit.
Ongoing Financial Struggles
Though it might seem like borrowing a few hundred dollars at a reasonable rate could be a good way to get over a tough financial hump, you’re taking a major risk. Consumers rarely pay back their payday loans within the short time period they need to in order to avoid tough penalties.
And unfortunately, when they are unable to make payments and their loan grows at a lightning fast pace, their credit suffers. Payday loan companies will report unpaid loans to credit bureaus, and it’s easy to understand how a loan growing at such a fast rate could damage your credit in a short period of time.
Data shows people who use payday loan services are two times as likely to file for bankruptcy. Something that was supposed to offer a quick fix ends up being the catalyst for serious financial consequences.
Payday lenders have been so predatory and cost consumers so much over the last few decades, the government has stepped in to help. Many payday lenders are working within the letter of the law, but just barely. Others have outright broken lending laws and gotten away with it for years.
To protect consumers from these devastating loans, the Consumer Financial Protection Bureau has begun investigating payday lenders in an effort to root out those who are breaking the law. Lawmakers have also tightened laws regarding lending at the federal and state level. In some states, certain payday lenders cannot even operate because their interest rates exceed the legal limits. Consumers are encouraged to report predatory and potentially illegal practices to the CFPB so lenders can be investigated.
The Federal Trade Commission (FTC) has also begun pursuing payday lenders for their deceptive marketing and billing practices. Many lenders fail to comply with the Truth in Lending Act and violate laws concerning electronic funds transfers. There are even instances in which payday lenders were investigated for discriminatory actions by locating their establishments in low-income neighborhoods and on Native American reservations.
It’s no surprise payday loans can seem appealing, but they are rarely what they appear to be. If you are tempted by a payday loan, your best bet is to avoid it and opt for any other solution.
If you’ve gotten yourself into the cycle of payday lending and there appears to be no end in sight, we can help. For more information or to discuss your payday loan situation, contact us at 1.800.220.4318 for more information or to schedule a consultation.