The economy may be recovering somewhat, a lot of people are still struggling for money. When the holiday season approaches, this struggle becomes even harder. People feel the pressure at many times, which is why they may be tempted to search for payday loans. Unfortunately, payday lenders are, essentially, predatory, as they specifically look for people who have a financial need. Payday lenders offer quick cash with very few strings attached, which is tempting to many people. However, you must be aware of the inherent dangers that come with these loans before giving in to temptation.
What Are Payday Loans?
A payday loan is also known as a ‘check loan’ or a ‘cash advance loan’. These terms are used because the repayment is usually due on the next payday of the borrower. They meet a number of specific characteristics, including:
• The borrowed amount tends to be small, such as $500 or less.
• Repayment is often due on the next payday, although new constructions also exist.
• You must disclose your next payday, so that the lender is immediately able to place a draft payment on your checking account.
• The interest rate is very high.
• In most cases, you can use the loan for any purpose, be it for something frivolous, such as a pair of designer shoes, or something important like a medical bill.
Why Payday Loans Are a Bad Idea
No matter when you repay the loan, you will always have to pay exorbitantly high interest rates, particularly when compared to other lenders. On a credit card, for instance, the range is between 12% and 30% per year. Payday loans, by contrast, have ‘finance charges’, which range from between $10 and $30 for every $100 that is borrowed. Based on that, the APR (Annual Percentage Rate) is close to 400%, with some even higher. Interest rates of 1,200% are not unheard of.
• Information on consumer interest rates
The interest rate, as you can see, is exceedingly high. And what is even worse is what happens if someone is unable to pay the loan back on time. Because of the construction of these loans, people often have to pay it back within one or two weeks. When some people experience a critical financial emergency that makes them turn to a payday loan, it is unlikely that this emergency will be resolved by the time they have to pay the loan back. At that point, the borrower is likely to ‘roll over’ the loan to a subsequent payday, with many borrowers rolling their loan over again and again. In the meantime, the interest rate will accrue exponentially.
Unfortunately, it can even get worse. In many states, payday lending is now illegal (more on that later). However, many lenders are now fully online, which means they are able to offer their services to consumers who live in states where payday loans are illegal. These payday lenders are often scammers who want to collect an upfront fee from you, leaving you with nothing at all. The website that they operate from will suddenly disappear, as will your fee.
Demographics of Payday Loan Users
Take note that there are 958 more payday lenders in the state of Missouri than what there are McDonald’s restaurants. This shows just how popular this type of loan is, and how many people are being targeted. As such, there isn’t a ‘typical’ payday loan user, other than that they tend to be people who have an immediate financial need and, in many cases, people with a poor credit history. However, a number of pieces of research have given some information in terms of the demographics:
• 38% of borrowers earn $70K or more per year.
• 24% of borrowers live in Western states.
• 42% of borrowers have used a payday loan before.
• 37% of borrowers have a college degree.
These statistics really show that people of all walks of life can be tempted into borrowing from this kind of lenders.
Pressure on the Payday Lenders
In many states, as mentioned previously, payday loans have been outlawed. This is because these have been officially recognized as being predatory. However, because the world is increasingly becoming online, it is all too easy for lenders to get around this. In fact, even in states where payday lenders are still allowed, there are often restrictions on the interest rates that they can charge, and they find that it is more profitable for them to become online.
There are a few specific reasons as to why many states have made payday lenders illegal. These include:
• These loans are usually designed to create a debt trap. The loans are very short term, which means borrowers often have to roll the loan over or they won’t be able to pay their other expenses.
• If the loan cannot be paid back, it can be rolled over and each of these transactions will cost the borrower more money.
• The percentage rates of interest on these loans average 400%, which is exorbitant.
• The borrowers will have to agree that the lender will place a pre-authorized electronic withdrawal on their bank accounts. Some have been known not to take out the principal, effectively forcing the borrower to roll the loan over without even knowing it.
• If the borrowers do not have sufficient money in their bank accounts, they will be hit with even more fees, both from the payday lender and from their own bank.
An investigation was launched into the practice of payday lending in 2013 by the Consumer Finance Protection Bureau (CFPB). They looked into the effect that these loans had on the finances of the average American. One year later, the CFPB has looked into around 1,600 complaints from consumers against payday lenders. Out of these, just 11% was closed in favor of the borrower.
As it completed its investigation, the CFPB also found that some 12 million people in this country use some kind of payday loan. Most worrisome of all was that 80% of these loans were not paid back within 14 days, which meant they were rolled over and hence incurred further interest rate and renewal charges. Additionally, 60% of people roll over their loan so frequently that they end up paying more in charges than they did actually borrow.
The Consumer Federation of America, an important consumer group, feels that the problem is that the lenders are usually not interested in the borrower’s ability to repay, but instead focus solely on their own ability to collect. They can access the bank account of the borrower, which means they can always collect. However, they will usually choose to accrue more money by suggesting that the borrowers roll over their loan, as this allows them to earn much more.
The Consumers Union, which is also a consumer group, is current looking into ways for the industry to make changes, as well as for ways to enforce these changes. They have made a number of recommendations:
• The interests and fees charged for each loan should be limited.
• The repayment schedules should be made longer, with the recommendation being a few months rather than a few weeks.
• The number of payday loans someone can apply for in one year should be limited.
What About Bankruptcy?
If some people find that their financial picture remains bleak and they must continuously roll over their loan or renew it, it is possible that they will have to apply for bankruptcy. Unfortunately, some people rely on payday loans to stay afloat, when it is actually making them sink deeper into debt. If this sounds like you, then filing for bankruptcy may be the next logical step.
Generally, payday loans can be discharged when someone applies for bankruptcy. However, a valid objection may be made by the lender. For instance, if the payday loan is no more than 90 days old, they may not be discharged. This is because it can reasonably be assumed that the borrower was already filing for bankruptcy and hence applied for a loan without every intending to pay it back.
What Can Be Done?
If you are in a situation where your bills are getting out of control and all your options have been exhausted, it may be tempting to turn to a payday loan. However, it is important to remember that the reality is that it is likely that your issues will only become worse at that point. If there really is no other option for you, do make sure that you will be able to pay the whole loan back on its due date, instead of rolling it over.
If your debt is overwhelming, it can be difficult to find a way out. However, there are options out there for you, such as speaking with bankruptcy attorneys, debt counselors, credit unions and more. Having consultations with these professionals does not mean you have to make a decision on the spot, but it will give you a better idea of your options and how to move forward.
There are many alternatives to payday loans. For instance:
• Credit unions, which tend to offer their members small, short term loans.
• Small bank loans, which are a cheaper and fairer alternative to a payday loan.
• An advance from your employer, which means you will essentially get a payday loan, but you won’t have to pay any interest.
• Borrowing from friends and family, even if the end result is that your pride will get hurt. Make sure that you have a clear repayment plan ready and that you stick to this.
• Save money, which is something you should always do anyway. Even if you can only put away a dollar a week, or even a month, it will start building up sooner or later.
• Credit cards, although you should only use these in real emergencies. A credit card is still a loan and quite an expensive one at that. Plus, if you struggle with repaying them, you will notice a negative effect on your credit score. At the same time, repaying them on time will mean having an improved credit score.
• If you wish to file a complaint, you must speak to the Department of Financial Services in your state. Do also contact this Department if a debt collector is attempting to recover a payday loan from you.
• Visit the Consumer Finance Protection Bureau (CFPB), or phone (855) 411-2372.
• Visit the FTC or telephone them toll free on 1-877-FTC-HELP (1-877-382-4357).
• Fraud and Abuse Online: Harmful Practices in Internet Payday Lending, a 2014 study by the Pew Charitable Trusts
• Check with the Consumer Financial Protection Bureau
• Check with the Center for Responsible Lending, where a range of information your rights as a borrower in the trap of a payday lender is listed.
• Visit USA.gov, for information on what to do if you are experiencing credit issues.
• Check on the CPFB‘s section specific to payday loans and lenders.
• Check on the Federal Deposit Insurance Corporation, where you can find guidelines for payday lending.
• Read on Payday Lending Regulations from the Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.