6 Reasons To Avoid Payday Loans

With all of the bad press payday loans get, including legislation aimed at curbing the predatory lending practices of the industry, one would think that people would stay away from their local payday loan business.

But that’s just not the case. In fact, the U.S. has more payday loan storefronts (20,600 according to the Community Financial Services Association of America) than McDonald’s fast food restaurants (12,804 according to NationMaster.com). The sign in the window could advertise “Cash Advances,” “Post-Dated Check Loans,” or “Deferred Check Loans”. It doesn’t matter – they all work the same.

Why is the industry still thriving? Two words: easy money.

“A payday loan can be approved in a matter of hours and there is usually no credit check,” says Theodore W. Connolly, author of The Road Out of Debt. “Typically, you write a personal check to be paid to the payday lender for the amount you wish to borrow plus a fee. The check is dated for your next payday or another agreed date within the next few weeks if you expect to be able to repay the loan. “

When you get paid, the lender gets their money. At least that’s the plan.

What can go wrong? A lot for many people. Connolly had an elderly client who had recently lost her husband as an attorney with the Boston law firm Looney & Grossman. She borrowed from a movie theater as a concessionaire on the basis of her paycheck. “When she came to me, her $ 250 loan was over $ 1,000 and the lender was adamant, even though she now had only social security contributions and was a verdict,” says Connolly.

Consumer groups have pushed for fee and interest caps, payday loan prevention databases, and other measures. Payday lending is illegal or prohibited by state law in 13 states. According to the National Conference of State Legislation, 21 states have payday loan laws pending as of the 2012 session to date. The Federal Consumer Financial Protection Bureau, which has extensive powers to regulate “non-bank” financial institutions, is also expected to tighten regulations on payday lending operations.

You don’t have to wait for lawmakers to help you avoid hassle with payday lenders. All you have to do is read the fine print, calculate the real cost of being stuck in a payday loan cycle, and find another way to get through to the next payday.

Here are six ways that payday loans can make you wish you had some other way to raise money or wait to get paid:

1. Payday loans are incredibly expensive.

Your most expensive credit card can have an interest rate of 28 percent or 36 percent – great. How come an interest rate greater than 10 times that high sound? If a $ 100 payday loan for 10 days is $ 15, that’s nearly 400 percent APR. Payday lenders are most prevalent in neighborhoods where significant numbers of residents cannot qualify for mainstream lending. It’s easy money, but Connolly warns, “Taking money without a credit check comes at a price, and it’s called interest.”

2. You may get stuck on a repeat cycle.

Some of the more reputable short-term loan deals are trying to prevent this from happening by maintaining a customer database to prevent rollovers, according to Stephen Altobelli, who represents Financial Services of America. “There are good payday loan providers and bad providers,” he says.

Still, according to the Center for Responsible Lending Research, 76 percent of payday loans are said to be paying off old payday loans. The nonprofit consumer group also reported that, on average, the borrower remains in debt for more than half a year, although most payday loans are repaid within two weeks.

“When the day comes when you need to pay back the loan, you usually have two options: pay off the loan, or pay a fee and extend the loan for another two weeks,” says Connolly.

3. Debt grows rapidly at these rates.

“You will most likely pay three, four, or even ten times the amount you originally borrowed. Payday loan debts often quadruple in just a year, ”says Connolly. “One small mistake can mean lifelong debt.”

4. Payday loans are too easy.

Most other loans or credit cards take a while to apply for. You can get a payday loan on your lunch break – leaving little time to think about it or consider other solutions, including foregoing the money at all.

Payday loans also have no right to recession. That said, if you change your mind soon after you’ve signed the papers, or if your spouse persuades you to quit, it’s a shame. You cannot resign.

5. Many payday loan companies require access to your bank account.

As “customer service” they say they withdraw the funds directly from your account. You don’t even have to write them a check! Good luck trying to stop this when the balance has grown and you cannot afford to pay it back and still be able to afford your basic living expenses. If they keep trying to get your payment through, your bank will also charge you overdrafts.

6. The day of reckoning when you owe more than you can pay back can be awkward.

Some payday loan companies have a reputation for horrific debt collection practices. The Fair Collection Practices Act is designed to protect you from late night phone calls, threats of prosecution, personal harassment of you or your neighbors, and other serious violations of your rights.

Remember, however, that payday loan companies are mostly dealing with people who cannot get credit through the mainstream channels. According to Kristen Hagopian, radio talk show host and author of Brilliant Frugal Living, payday loans also pose significant risk to the lender with a default rate of 10 to 20 percent. These lenders are used to being very, very aggressive when people don’t pay back loans as promised.

If you’re writing a check to be deposited later and you don’t have enough cash to pay it at the bank, both your bank and payday lender will likely be charging you for undeliverable check fees.

Connolly’s client was lucky. Connolly was able to convince the lenders that she had no money or property to seize. They withheld their threatened lawsuit, she moved to Pennsylvania, and as far as Connolly knows, she has heard from them. Not every case can be solved that easily.

“Given the risky environment, not to mention the higher interest rates, it is obviously preferable for a household to avoid these loans like the plague,” says Hagopian. “Do whatever you can to set aside a small amount of money on a regular basis to avoid the regular use of payday loans. Using payday loans regularly – and paying them off with high interest the next payday – is basically throwing good money away. “

See related: Banks ‘direct deposit’ alternatives to payday loans aren’t cheap either, consumer surveillance begins with surveillance of ‘non-bank’ businesses

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The editorial content of this page is based solely on the objective assessment of our authors and is not driven by advertising money. It was not provided or commissioned by the credit card issuers. However, we may receive compensation if you click on links to our partners’ products.

About Bradley J. Bridges

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