Are you curious to find out how a community’s financial situation is doing? Abandoned houses or vacant shopping centers are an obvious sign things aren’t good, but a more subtle indication of financial insecurity is the number of payday lenders in the area — businesses that cater to cash-strapped customers willing to pay exorbitant interest for small personal loans.
Pew Charitable Trusts conducted a 2015 study and found that 12,000,000 Americans take out payday loan each year. They also spend $7 Billion on loan fees. Although they are often misrepresented as fees, the actual interest rates range between 300%-500% annual percent rate (APR).
Comparing the 15%-30% APR credit cards with the 10%-25% personal loan rate from a bank/credit union, it’s hard for anyone to believe that this is the right route when having the problem with payday loans.
Pew estimates that payday loan customers typically come from mainstream workers who make at least $30,000 annually. Payday lenders target financially poor customers who can’t afford credit cards or have limited credit limits. They are often unable to pay back past financial problems. People without credit can often borrow more than they have with traditional credit cards to cover short-term costs. Although they may use a payday loan for rent to cover their bills and avoid eviction, the huge interest payments can leave them in worse condition.
What is a payday loan?
Payday Loans are unsecured cash advances for small amounts (usually less then $1,000), with high interest rates. Also, they have short repayment terms.. A typical loan is $500 Borrowers will often require a loan to cover their essential expenses, such as rent and utilities. Although the name implies that loans are linked with a borrower’s pay, lenders will sometimes grant loans if the borrower can repay the cash promptly.
Payday loan lenders in the United States usually operate from low-income locations. These payday loan companies are typically run by people with bad credit who don’t have access to the money they need to pay their urgent bills. Payday lenders employ different methods to calculate interest rates. They can often charge up to 400% annually.
Many people believe that payday lenders charge high fees because they deal directly with high risk customers. In reality, default rates tend to be very low. Many lenders have withdrawn from states where payday loan interest rates are regulated by many states.
Banks might be offering small loans
The federal Office of the Comptroller of the Currency – which regulates national bank accounts – announced that banks would now be able to issue loans of less than $5,000 and will no longer have to comply with standard underwriting regulations. The goal is for banks to cease lending to people whose credit history makes it impossible to receive conventional loans and credit cards.
These loans were sometimes called deposit advances by banks. They were usually repaid quickly, often before borrowers’ next paycheck. In 2014, new banking regulations ended this practice after regulators warned that deposits advances could sometimes cause borrowers to incur crippling debt. The 2018 revision will allow banks, but not for too long, to return the business. The CFPB intends to impose strict regulations about loans that are less than 45 calendar days.
However, in June 2018, the bureau’s acting director stated that he would like to reconsider the rule.
Payday loans: Who should they be used for?
The Community Financial Services Association of America reports that nationwide, there are 18600 payday advance centers that have given credit of $38.5 billion to 19,000,000 households.
Payday lending is appealing because it allows you to borrow quickly and gives you access to cash.
Payday loan lenders make a living from repeat customers. This is usually low-income minorities. They don’t offer borrowers any repayment options and have very few regulations in many states.
Payday lenders advertise online, on radio, in the mail and online. Their target audience is working people who have difficulty making ends meet. Although loans are advertised as helping with unexpected expenses, seven of 10 borrowers actually use them to cover regular, recurring costs like rent and utilities.
Payday lenders offer cash-advance loans, check-advance loans, post-dated check loans or deferred-deposit loans. They don’t usually check credit histories. This makes it easy for customers to get loans. However interest rates are extremely high and they are not savvy borrowers.
The Consumer Financial Protection Bureau (CFPB), a federal government agency, issued a report in 2014 that showed most payday loans are made to borrowers who renew their loans so many times they end up paying more in fees than the amount they originally borrowed. On average, payday loan borrowers spend $520 to pay fees for a $375 loan.
Despite the known consumer hazards, the U.S. Payday Loan business thrives where interest rates aren’t limited. Dartmouth economists estimated that in 2008 there were more payday lenders than McDonald’s restaurants and Starbuck’s coffee houses combined. However, rate caps in increasing numbers of states are a sign that the business is losing its footing. Pew’s study found that payday loan lenders are less prevalent in 36 states than 44 states in 2004.
The business has suffered because of the decrease in operations. The Center for Financial Services reports a steep decline of the storefront business, which began in 2013. It also reported that revenue fell 23.4% by 2015 to 2014. In the same period, nonbank online payday lenders saw their revenues decline by 22.5%.
However, with declining payday loan revenues, subprime credit card issuers have made large gains, keeping the level for all subprime consumer financing relatively stable over the past several decades.
How do payday loans work?
A payday loan can seem simple. The process is simple. All you have to do is bring your pay stub. Some stores can double as cashiers. The clerk will offer you a small amount, typically between $100 and $500. It is due when your next paycheck comes in. You’ll agree to pay what may sound reasonable – $15 for each $100 borrowed.
The lender will request that you sign a check postdated to cover the loan plus any fees. You will be informed that the check will automatically be cashed at the expiration of the loan period, which usually takes two weeks. Sometimes, the lender will ask you for authorization to electronically withdraw funds from your bank account. Cash-strapped customers quickly discover they cannot afford to live on the next paycheck. This is when they call the lender and request an extension of their repayment. This can quickly add up.
The federal Truth in Lending Act regulates payday lenders. It requires lenders that they disclose the total cost of the loan. Before you can sign for the loan from payday lenders, you must first disclose the cost of the loan and the annual interest rate (APR).
While payday lenders typically operate from storefronts in the UK, a newer category of loan providers uses the internet. Some offer loans directly. Others are information brokers that answer questions and provide the lenders with the results. Online lenders can be risky according to financial experts. Online lenders might offer loans, but you cannot be certain if they will share your information for other purposes. Scammers could also be at risk. Many online sites act as information brokers and collect your financial details to sell to lenders.
Payday loans cost
In a relatively short period of time, borrowing costs can go up dramatically. Lenders really like to hear that cash-strapped borrowers return to lenders to say they don’t have the funds to repay the loan. They will offer you an extension known as a Roll Over. This will give you an additional two weeks to repay your loan, with the condition that you pay another fee.
After the first rollover, $30 will be due in addition to the $100 that you borrowed. Six months later, you will owe $180 plus the principal. This leaves you with a total of $280. Borrowers can get trapped in a debt cycle and end up taking out additional payday loan to repay their old loans, thereby sinking deeper into financial woes.
For many years, the primary customers of payday loan lenders were military personnel and those in need. Payday loan lenders used to operate just outside military bases’ perimeters, extorting soldiers and their families. To end the practice, a federal law in 2007 set a maximum annualized payday-loan rate of 36% for active-duty service members and their families. It’s no surprise that lenders are moving away.
Payday loans are not recommended for you.
Remember to think before you borrow. Payday borrowing can lead to financial ruin.
- Payday loans can be quite expensive: High-interest credit cards might have APRs between 28-36% for borrowers, but the average payday lender’s APR can be as high as 398%.
- Payday Loans Can Be Financial Quicksand– Most borrowers cannot repay the loan within the standard two-week repayment time. They can borrow the money back or pay an additional fee, sinking them even deeper into debt.
- Borrowing from Short-Term Loan Lenders is too Simple– Bank loans not for you Credit card accounts, payday loans don’t require extensive paperwork. Simply walk into a store to sign some papers and write a check. And unlike other loans that you may have, once you sign the papers, you cannot withdraw the money.
- Payday lenders may want to access your bank account: They claim it will save you time writing the standard post-dated check. The payday lender can attempt to withdraw funds multiple times if they don’t have enough funds. This is often the case when the loan due date approaches.
- Payday lenders may be cruel debt collectors– Do not repay the loan. Be prepared for a string of late-night tactics. Calls coming from debt collectors.
Payday loans could ruin your credit
Payday loan can be very attractive, especially for those with less-than-sterling credit records and cash reserves. Don’t be fooled by payday lenders who don’t seem to care much about your creditworthiness. Borrowing the money can be dangerous.
If you cannot repay the loan within the agreed time frame and the lender refuses to give you a rollover, there could be an immediate problem. A lender may require you to postdate your check before they issue the loan. Your next payday will see the check deposited. If the check bounces, you go into default and could enter debt-collection hell.
The payday lender is the first to try to collect your debt. It may attempt to repeatedly deposit your checks or withdraw money incrementally from you bank account. Your account will be subject to bank charges for each unsuccessful attempt.
If the withdrawal attempts are unsuccessful or your checking account is closed, the lender may try to call you at unconvenient times.
If there are more unsuccessful efforts, the lender might suggest a settlement for a reduced amount. Because the amount you owe also includes high interest, a lender may not experience a loss in a settlement agreement.
If all else fails the lender might refer your matter to a collection agent, who will initially try to bombard you by phone calls. Later they might even take you to court, which can end up in the public records portion of your credit report if a judge rules in the lender’s favor. This can make it very difficult for you to get credit if your credit rating is damaged. Even if credit wasn’t in good standing before defaulting on a payday loan, it is almost certain that a fresh collection action will make it worse.
Do not let this ruin your credit score. Instead, notify the lender right away if your loan check has bounced and ask for a payment plan. This might mean higher fees and make the loan harder to repay, but that trumps major credit problems.
Other options include borrowing money from your friends or family or delaying the payment of a more pressing debt. Another option is to take a cash advance. If your account has overdraft protection, you could write a cheque. Overdrafts can lead to bank charges. But if you have the ability to raise the money necessary to pay the bank fee, it might be more advantageous than tangling with a payday lender.
Payday Loan Lenders Prey On the Poor
Payday loan services are available at many banks, check-cashing outlets, pawn shops, payday loan stores and other locations. Payday loan locations are open all day, allowing you access to cash no matter what time it is.
Payday lenders require that borrowers submit a check for the amount and the fee. Lenders agree not to deposit the checks until the borrower has earned his or her next paycheck. Because most people receive biweekly pay, the average loan period lasts two weeks.
When the next paycheck arrives, the borrower will have the choice of either letting the check pass, returning to lender to pay in cash, or opting to pay more to allow the loan rollover. Payday lenders will charge fees for bounced checks. They can also sue borrowers for writing bad cheques.
This process allows those with poor credit or little credit to quickly obtain cash. Payday lenders do not check borrowers’ credit scores, nor do they report borrowers’ activity to credit bureaus.
Lenders require borrowers that they earn at most $1,000 per month and to offer the following:
- Your home address
- Checking account number valid
- Driver’s permit
- Social Security number
- A few pay stubs to confirm employment, wages and dates
Payday lenders frequently look for places in low-income and minority neighborhoods.
The typical borrower has at least one of the following characteristics.
- Young age
- Has children
- High school graduates
- Does not own his/her home
- Relies on Social Security check
- No other type of credit available
Nearly everyone who goes to a payday loan lender has been there before. It is quite common for a customer, after repaying the loan amount and paying the associated fee, to never return to the store. Payday loans are only 2% profitable for customers who come to the store once.
An estimated 90% of borrowers get five or more loans in a given year. On average, nine. Each loan comes along with an initial charge, which is compounded each year.
These are the most common characteristics of payday clients, according to Georgetown University’s McDonough School of Business Credit Research Center.
- Limited credit availability
- In the last five-years, a pawnshop loan was taken
- Filled for bankruptcy protection within five-years
- Made late payments on mortgage or consumer debt in the last year
Payday lenders also target military personnel. In 2005, 1 in 5 active-duty soldiers was payday loaned..Since 2007, however the Department of Defense has not allowed lenders to require borrowers to submit a check. In addition, the annual percentage rates for military borrowers have been limited at 36%.
Some states place restrictions on payday lenders. These rules are similar to the ones that apply to businesses that are sexually explicit.
Alternatives for Payday Loans
Payday loan borrowers often don’t realize they can borrow the money anywhere else. However, there are options. There are many:
- Credit Unions and Small Loan Companies – Credit unions can be an excellent place to start your search for small loans. It’s much easier to join one. The members also act as owners so that they are more flexible in determining loan eligibility. Many local lenders are willing to lend small amounts to businesses at competitive rates. A second option is to apply for credit-card cash advance. The interest rates on credit-card cash advances are lower than those offered through payday lenders.
- Be sure to shop before you decide – Compare APRs & Finance charges from all sources. Other lenders might be willing to pay higher rates, but they may not have the high loan-rollover fees that payday lenders often demand.
- Protect Yourself – If you’re unable to pay your loan payment on time, it is worth contacting creditors and loan servicers. They may be willing work with and offer a payment program that might reduce the need for a loan.
- Get credit counseling – Non-profit agencies offer credit advice at low or no cost to borrowers. Go online, speak to a manager of a housing authority, credit union or employee’s personnel division for ideas.
- Set a Budget– Establish a cash flow and cash outflow balance. It is essential to know what your cash inflows and outflows are. Personal finances – This is a good idea. Next, reduce any expense that isn’t essential. You might consider dropping cable as a place to cut down on expenses. Drop to a less expensive package or look for another provider. You should not borrow at high interest rates to finance your monthly expenses. Move to a place that is cheaper if it’s impossible to pay rent without a mortgage.
- Find out if Overdraft Protection is available for your checking account– It is important to protect your credit against credit damage due to bounced check. It’s also important to know how much overdraft coverage costs and what it covers.