Posts Tagged ‘is payday loan risky?’

High Payday Loan Interest Rate Is Not The Only Thing To Worry About

It is not without reasons why 16 states have either banned payday lending or strictly prohibited the lenders from charging high payday loan interest rate. These loan programs are very risky. But, since they are advertised in such a way that consumers often get trapped into it assuming these programs as easy solutions to their temporary financial problems. In reality, these types of short-term cash advances are very much likely to make your temporary financial problems permanent and worse.

How Do Payday Loans Work?

Payday loans are very small amount of loans (usually under $500) that are offered for a very short period of time (just a couple of weeks, usually until next payday) at an unusually very high payday loan interest rate (in 3-digit APR). Borrowers usually get two options for repayment – they can either authorize the lender for direct electronic debit from your checking bank account or they can simply give them a post-dated check. There is a certain amount of processing fee also applicable; it means you get the borrowed money minus processing fee. When the due date comes in, the lender deposits the check or withdraws money using debit authorization. If there is insufficient fund in your account, the loan gets automatically renewed or rolled over with various extra charges, such as check bouncing fees, late fees, interest for the extended period of time, and an array of other charges.

The Problems

- To start with, the biggest problem is that the payday loan interest rate is very high, ranging from 150% to as high as 600% or even more. For a small loan of $300, you may have to pay back over $400 (that includes over $100 just as interest and other charges).

- The second problem is that payday lenders mainly target those consumers who have very limited monthly income, especially the ones who live paycheck to paycheck. These types of consumers often find it very difficult (almost impossible) to pay back the loan on the set due date because the repayment period is very short (just one or two weeks), not enough to save the money needed to make the repayment. Even if they do manage to pay off the loan in time, they will again be in financial trouble the next month because a large portion of their salary will go towards debt repayment. As a result, many people keep on borrowing short-term cash advances almost every month, and the cycle continues, gradually pushing them deeper into payday debt.

- If the check gets bounced because of insufficient fund, the borrowers are hot twice, as both lender as well as the bank charges hefty amount of check bouncing fee. This significantly increases the debt burden.

What To Do If You Feel That Short-Term Cash Advances Are Your Only Options?

- The first thing you should do is to shop for the lowest (reasonable and affordable) payday loan interest rate and other charges. Many states have imposed small loan rate cap.

- Educate yourself about the laws in your state. Find out of payday lending is even legal in your state or not.

- Do a practical calculation about your income and expenses in order to find out how much amount of money you can really afford to repay.

- Read the fine prints thoroughly and make sure that you understand all terms and conditions and that there are no hidden charges or clauses. You should pay special attention to mandatory arbitration clauses (if any). Many payday lenders include a clause in the contract that gives them the legal right to wage garnishment if the borrower fails to make the repayment on the set due date. Other possible arbitration clauses may include an agreement by borrower not to file for bankruptcy and an agreement not to participate in class action lawsuits.

- You have to be particularly more careful if you are considering borrowing from an online lender. Online lenders are sometimes hard to locate and it becomes very difficult to take legal actions against them if you find them engaged in unfair or illegal lending activities. If you are not sure whom you are dealing with, do not deal with them. Never disclose sensitive personal financial information, social security number, or bank account number to any unknown entity; if you do so, you risk becoming a victim of identity theft.

Never take another payday loan if you already have one outstanding in your name. If you do so, the high payday loan interest rate and other hefty charges will make your debt situation unmanageable. Do everything you can do to avoid these predatory lending programs. There are several alternatives out there; you just have to look around. Never make impulse decisions. Do a thorough research and practical calculations before you make a financial move.


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