More than half of American consumers live paycheck to paycheck. For someone in this financial situation, a new pair of tires for their car or a hospital bill will mean a financial crisis. For people in need of quick cash, a payday loan can seem like a viable option.
In fact, however, it is a trap best avoided. Read on for an in-depth discussion of why payday loans are not the financial solution so many people need them to be.
Payday Loans Are Very Expensive.
It is a good bet that when someone signs the paperwork for a payday loan and leaves with their money, they don’t realize that if they miss any payments, the interest rate on their loan can skyrocket to 391%. You can be forgiven for thinking that was a typo, but it’s true – triple-digit interest rates are the reason a $500 payday loan can become a monstrous loan of several thousand dollars that becomes too difficult to pay back.
The problem lies in the fee-based structure of a payday loan. The loan is meant to be a quick solution, one paid back in only a few weeks, but the lender charges a high lending fee. Payday loans are, in effect, very different from other types of loans. For a great explanation of how a customer can end up paying a 391% interest rate on their payday loan, look at this article. It will explain why so many people seek payday loan relief and turn to debt consolidation.
Just how prevalent is payday loan debt? According to the Consumer Financial Protection Bureau, 80% of payday loans are not repaid within two weeks, so there are plenty of people who are struggling to pay off what was supposed to be a short-term solution to paying rent or perhaps an electric bill. Don’t be one of them.
Payday Loans Are Financial Quicksand.
What happens when you can’t meet the two-week deadline for paying back your loan? The lender will, of course, allow you to “roll over” the loan. In return, though, you have to pay a higher interest rate.
The laws concerning this vary from state to state, but assuming it’s possible, the borrower will pay the minimum or the fees, and the loan is extended. However, the issue is that if you do not pay off the loan, the interest rate will grow as will any finance charges.
Borrowing Is Too Easy, So It Increases Debts Faster.
It’s more difficult to borrow from banks and to obtain a credit card. You have to fill out a lot more paperwork and undergo background checks to show the lender that you are not a loan risk. That paperwork, however, outlines your responsibilities and rights.
With payday lenders, you don’t have to fill out so much paperwork, and it’s much easier to walk out with your money. Ask yourself, however, why it’s so easy to get that payday loan. Answer: you have fewer rights with payday lenders than you do with banks or credit cards. Alarmingly, you also don’t have a right of rescission, meaning that once you give the payday lender your signature and accept the money, you can’t change your mind.
Some Payday Lenders Want the Right to Access Your Bank Account.
It has become the norm these days to set up automatic payments through online banking. This is fine if you’re in control of when and how much money comes out of your bank account. Consider, though, what happens when the payday lender asks you to give them the right to access your bank account. This is to save you from having to write a post-dated check. While it can be convenient to set up your payments this way, if you are unable to pay when the payday loan is due, the payday lender is able to repeatedly try to withdraw the money. This can result in multiple overdraft charges, which leads you to greater payday loan debt.
Payday Lenders Can Be Ruthless Debt Collectors.
If you are unable to repay your payday loan, some payday lenders can quickly become a nightmare and harass you at home and at work. Fortunately, however, you do have rights, as outlined under the Fair Debt Collection Practices Act (FDCPA), which says debt collectors can’t harass, oppress, or abuse you or anyone else they contact.
Payday lenders do not have the right to repeatedly call you with the intention of abusing or harassing you or whoever answers the phone. They cannot threaten you with violence or harm, nor can they use profane or obscene language. While payday lenders can report your information to a credit reporting company, they cannot publish a list of people who refuse to pay back their loans. They are also prohibited from making false threats to have you arrested or to make threats about doing things that are legally not possible.
It is always wise to keep a file of all correspondence between you and a debt collector. Remember to keep track of all dates and times of conversations as well as the names of people you spoke with and the topic. If you ever go to court or seek payday loan relief, having a paper trail could assist you.
The Takeaway for People Considering Payday Loans
Information is your best weapon when it comes to deciding what kind of loan you should get for your situation. Payday loans are best avoided despite how easy they can be to get. That $300 you get might take care of your medical bill, but it can quickly snowball into an unmanageable debt that is far more expensive than what you originally took out. It is a headache best avoided.