Payday loans, also known as “payday advances”, are short-term cash loans given to a borrower to cover expenses until his next payday. Typically, the borrower will write a personal check for the amount they are borrowing plus the finance charge, or sign over electronic access to their bank account to the lender. The online loans pay day lenders hold these checks until the borrower’s next payday, when the loan and finance charge must be paid.
These loans typically have a high 400% annual interest (APR) or more, some as high as 780% APR. The shorter the borrowing term, the higher the annual interest. For cash strapped individuals, these high interest rates are likely to cause a debt-cycle. If they can’t repay their first payday loan, they are forced to renew the loan and pay the finance charge every payday until they can afford to pay the principal and get themselves out of the debt-cycle. It’s been found that consumers have an average of eight to thirteen loans per year at a single lender!
If a loan goes unpaid, the personal check received is deposited into the borrower’s bank account, which then causes bounced check fees from the lender and the borrower’s bank. This also adds negative credit ratings on the borrower’s report. The borrower could even lose his bank account if he develops a record of “bouncing” checks. Research has shown that payday loan users are almost twice as likely to file for bankruptcy! The lender will do whatever it takes to retreive the money you owe; this may include calling the refrences you supplied when you signed up for the loan, and may even call your place of employment (though legally, they can only verify your employment, business location, and whether you have medical insurance to cover a medical bill.) Collection agencies will start calling your home, often threatening to have you arrested for check fraud.
Banks, the government (federal and state levels), and consumers all agree; payday lenders take advantage of the lower income workers. They profit from the borrowers’ poor financial situation. With the high annual interests and associated costs, payday loans are just a debt-trap. If a borrower is cash strapped, he should go a different route to obtain a loan. Other options include borrowing directly from family or friends, small consumer loans, cash advances from credit cards, paycheck cash advances from employers, or credit union loans with lower interest rates. Payday loans should be an absolute last resort to keep a borrower out of debt!
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