WHAT ARE PAYDAY LOANS?
A loan is a type of credit vehicle where a sum of money is lent to another party in exchange for future repayment of the amount of money including an agreed amount of interest. There are different types of loans, one of which is a Payday loan.
A payday loan is a short-term loan where the lender gives the borrower an amount of money and extends a high interest rate based on the borrower’s income. It is a short-term loan that can be used to take care of and cover immediate cash needs until you get your next paycheck. Repayment of payday loans is usually within two weeks or close to your next payday.
HOW DO PAYDAY LOANS WORK?
The first thing to note is that payday loans work slightly differently from other consumer loans.
To access a payday loan, one must be familiar with the laws, rules, and regulations guiding it in their locality. Different states have different laws that regulate the activities of loan creditors and how payday loans operate. Some states’ regulations limit the amount one can borrow as a payday loan, how much interest the lender can charge on the loan, and other fees involved, while others prohibit payday loans altogether.
The second thing to note is that payday loans can be issued either by cash or cheque or as a deposit into the borrower’s bank account. Most payday loans must be paid back in full within the next two weeks or immediately after your next paycheck is paid.
The third thing to note is that payday loans come with high charges. Due to the short amount of payback time, creditors of payback loans usually charge a higher amount of interest on them. Sometimes the rates can be as high as 30% of the total amount borrowed.
Most credit facilities offer payday loans and they can be found on the internet too.
ADVANTAGES OF PAYDAY LOANS
Although there are a lot of arguments about the exploitative nature of payback loans, there is no doubt that they can serve as lifelines in urgent cases. The following are major advantages of payday loans.
- Fast and easy application: In this age of technology and the internet, it is very easy and fast to get access to a payday loan within hours. There are several credit facilities online that give access to payday loans to individuals, some of them do not even require a credit score of the applicant. This may not be the case when requesting other types of loans that may require more rigorous steps and procedures.
- Instant availability of funds: Once a payday loan is approved and granted by the lender, the funds will be disbursed and given to the borrower immediately. It is not the with other types of loans as some of them may require a lot of bureaucracy and complex procedures before the funds get to the borrower.
- Legal protection: In a lot of jurisdictions, payday loans are regulated by the government to protect the rights of consumers and borrowers. This often prevents the exploitation of the borrowers by credit lending facilities. The government may set an interest limit on the amount of interest that may be charged on a payday loan.
- Easy qualification: Most payday loans do not require too many qualifications. In most cases, the lender only needs to verify that the borrower is gainfully employed and receives a salary or wage regularly, and can afford to take the loan and payback. Some loan creditors do not even require a credit history or credit score.
DISADVANTAGES OF PAYDAY LOANS.
Some people believe that payback loans are detrimental to borrowers due to the high level of interest amongst other factors. Here is a list of disadvantages of taking payday loans.
- Payday loans are bad for your credit score: Payday loans can be very attractive especially with people who do not have a credit score. However, this can be dangerous subsequently for your credit score. If you are unable to pay back at the agreed date and fail to get an extension from your creditor this can affect your credit score. This can be a hindrance to getting loans in the future.
- Payday loans are quite expensive: due to the short payback period, loan creditors attach a higher interest rate to payday loans. Sometimes the interest can be as high as 36%.
- Payday lenders may be dangerous and ruthless: Some payback loan lenders are loan sharks and can go to any length to recover their money. Lenders may provide their addresses, bank account details, and even next of kin information at the time they borrowed the money. However, some loan lenders may use this information against them in a bid to recover their money.
- Some loan lenders may take payments from your bank account: Some loan lenders ask borrowers for CPA (continuous payment authority) before approving a loan. This invariably gives them access to directly take payments from the borrower’s bank account up to any amount they desire. This can be a huge problem for the borrower if the lender lacks integrity and is dubious.
PREDATORY TACTICS EMPLOYED BY PAYDAY LOAN CREDITORS.
A lot of payday loan creditors employ tactics to lure and tempt borrowers to continue to patronize them. These tactics are what make payday loans attractive and mouthwatering initially to the borrowers. These tactics are what formulates predatory lending. Predatory lending refers to any lending practice that imposes unfair, deceptive, and dubious loan terms on borrowers. The following are a couple of tactics employed by loan sharks and creditors to encourage people to take payday loans.
- Loan flipping: This is very common and is often targeted at low-income borrowers. Loan flipping occurs when a lender refinances a loan for a higher fee and higher amount of interest. This is used to encourage borrowers to take out a higher amount of loan with the incentive of a longer payback period. However, the truth is the borrower ends up incurring a higher amount of debt and higher interest rates. This is in no way beneficial to the borrower.
- Excessive fees: These fees are often disguised and may not even appear in the initial interest rate but somehow show up at the payback time. Some of these fees may even be more than 5% of the total loan taken.
- Steering: This tactic is often used to prey on an applicant’s urgent need for a loan. It occurs when the loan lender convinces the borrower to take a loan that may have less favorable terms or conditions than the one they initially applied for. The loan lender uses incentives like a higher amount and a longer payback period to trick the borrower into going for it.
- Hidden balloon payment: These are high amounts of payments at the end of a loan payback period. The borrower is unaware of this payment at the beginning of the loan and was probably attracted by the lower upfront payments. However, the borrower may struggle to keep up at the end of the payment period.
Although payback loans can seem beneficial and attractive in the beginning, in the long run, they can do more damage to the borrower than good. Hence, it is advisable to carry out due diligence on the credit lender, check out the interest rates, seek out many alternatives and ensure that there are no hidden charges in the agreement before taking one.