Payday Loans- A Closer Look
Payday loans are short term loans (7-30 day loan) offered by payday loan companies to provide consumers with emergency cash.
Payday loans are unsecured loans that are also referred to has ( text loans, doorstep loans, guaranteed loans, pay day, same day loans, online pay, online payday loans and payday loan bad credit). The above listed examples are only a few terms that are often used to describe payday loans.
The payday loan business is a multi-billion dollar business with deep pockets. High profit margins at payday loan providers, gives payday loan lenders access to huge amounts of dollars for marketing. Dollars funneled towards payday loan marketing, make it possible for payday loan providers to aggressively market it’s products and services using a variety of media channels.
Payday Loans Under Fire
High unemployment rates, job cut backs and downsizing have forced many people to depend on payday loan lenders to maintain their standard of living. Back in 2012, the Office of Fair Trading filed complaints against fifty payday loan companies. The Office of Fair Trading filed complaints after receiving consumer complaints regarding the fifty payday loan companies under review.
Consumers complained about aggressive tactics used by payday loan companies, thus taking advantage of people in financial need. Complaints filed by the Office of Fair Trading seem to suggest that the 50 payday loan companies that were under review in 2012, did not seem to care if borrower’s could actually afford to repay loans.
Payday loans are big business not only for the Unites States, but the UK as well. There are actual reports indicating that many low income people in the UK are actively using payday loans to pay their monthly rent. There are mixed reviews about payday lenders.
Many people are concerned with the high interest rates charged by Payday lenders. I believe there is a need to look at the interest rates charged by payday lenders.
According to the Community Financial Services Association, payday loan interest rate limits are determined by individual states. If this is the case, we need to look at individual states making changes to protect consumers in their state.
There should most definitely be limits in place to assist those who actually use payday loans. However, we must also look at banks and credit unions that charge high interest rates on credit cards, mortgages and automobile loans for people with less than perfect credit.
I am not taking up for the payday lenders. Instead, I am suggesting fair treatment and changes for all types of financial businesses. Let’s consider people who have been forced to leave their homes because they could not afford the payments because the interest rates were so high.
How about the young family that has not been able to payoff their credit card debt because of high interest rates. Or, let’s consider the recently divorce mother who needed transportation and established a auto loan with an high interest rate.
I believe there should be changes with all lines of credit and loans. This does include credit cards, mortgages, car notes and all unsecured loans.
Are Payday Loan Lenders Taking Advantage of Low Income Workers?
There’s a lot of debate going on about Payday lenders. Many people believe that payday loan lenders are fattening their bank accounts off the backs of the poor. There may be some truth to this belief.
However, the question remains, “How do we solve this problem?”. Well, I believe financial education and financial literacy are the key to changing things. I do not know if I agree that the government should take the right for people to do business the way they see fit away.
Still, the fact remains that we must have resources available to educate people about finances. Sure there are services available. But, there is not “real” aware in regards to financial literacy.
Payday Loan Customer Testimony #1
Working in the banking industry, I have witnessed a few cases where consumers found themselves in financial trouble with payday loans. I must express in these cases, every attempt was made to educate the consumer about the need to use payday loans
responsibly . One particular customer interaction comes to mind for me. I remember assisting a consumer who owed no less than 5 payday loan companies money. After receiving the money from the payday loan lenders. This particular customer attempted doing a charge back to avoid repaying the money.
The customer acknowledged that he used the money as it was reflected on his bank statements. However, the customer did not want to repay the money. There was no personal responsibility and accountability on this customer’s part. It was an interesting situation that left me understanding that it is impossible to help everyone.
Payday Loans Ruin Family
My next payday story involves a family who became very dependent on payday loans. For the stake of privacy, we will call my family member Bob. Bob began getting payday loans as a way to pay small bills. The ease of payday loan access resulted in Bob getting payday loans each week just to pay what was borrowed.
The interest kept growing and growing. Finally after a heart to heart conversation with Bob. I convinced Bob to leave the payday loans alone.
How Does a Payday Loan Work
Here’s an example of a payday loan works: A consumer receives an expected bill in the mail that must be paid in 3 days. The consumer does not have the money in his/her bank account to pay the bill in 3 days. The consumer’s payday from employment is 7 days away.
In order to pay is urgent bill, the consumer applies for a payday loan online.
To satisfy the requirements of the payday loan company, the consumer will be required to:
- Provide proof of income in the form of the last two most recent pay stubs.
- Most recent bank statement copies
- Cancelled check (this provides information connected to the routing number, account number and bank name)
In exchange for receiving emergency funds, the consumer agrees to pay the company that provides the payday lender an high rate of interest. Payday lenders charge anywhere for over 300%- over 500% in interest for emergency cash.
Payday Loans- Many People have turned to Payday Loan Companies for Help
With ups and downs in the economy, many consumers have begin to look for alternative ways to make ends meet. Corporate down sizing, layoffs, death of a loved one, tax bills and other unforeseen events have resulted in many people needing access to quick money.
With added pressures on consumers more and more businesses are offering payday loans to assistant people who need emergency cash. Sure there payday loans offer consumers the ability to access anywhere from $200 to $1500 with ease.
However, that quick payday loan money is going to cost a heft penny. But, is this wrong? Should payday loans have the right to charge high interest rates to people in need of fast cash? Should the government restrict payday loans from charging such high interest rates?
Like it or not, this is America. This is the home of the free. This is a land that prides itself on freedom of choice. America’s foundation is based on liberty for all.
There is no doubting that payday loans are an expensive way to pay for emergencies. However, who wants to the tell a consumer with a life or death financial situation who does not have access to more tradition financing options that he or she can not get a payday loan.
It’s most definitely not going to be me. I am staying away from telling others what they can and can not do. This is the reason for reviewing a closer look at payday loans.
Financial education is the key for success for any person. The more we know, the more we can grow financially. The more financial education that one has, the better his or her financial decisions.
Payday Loan Alternatives
Alternatives to getting a payday loan include:
- Borrowing money from a family member
- Using a credit card
- Selling unwanted items
There are alternative borrowing options available for consumers who need access to quick cash. However, alternative payday loan borrowing options will depend on the individual credit history of lenders. Regardless to the extra work that may be involved for consumers with credit problems.
Looking for a alternative solutions to borrowing will save consumers a tremendous amount of cash. Payday loans are convenient and only require a job, income and an active bank account. However, consumers should not allow payday lending easy approval to get them trapped financially.
Payday Loan Lender Alternatives Include
- Credit Unions
- Retirement Account
- Savings Secured Loans
- Using a Credit Card
Payday Loans-Consumer Protections
The federal regulation that protects consumers during a payday loan transaction is called the Truth in Lending Act. The Truth in Lending Act was first introduced May 29, 1968.
However, The Truth in Lending Act did not become a federal law until July 1, 1969. Throughout the years, there have been numerous amendments to the Truth in Lending Act.
Under the Truth in Lending Act, there are federal laws and provisions for a variety of consumer loan products including:
- Lines of credit
- Credit cards
For the purpose of this review, we will review key rules and regulations as they relate to payday loans. Payday loan companies are required to properly disclose all fees that are associated with a payday loan.
The APR (Annual Percentage Rate) must be disclosed to payday loan consumers as a part of the Truth in Lending Act. The annual percentage rate provides consumers with detail rate information. The amount APR represents the total amount of interest that a consumer would pay for the course of a year.
Let’s look at an example of an APR or annual percentage rate. A consumer takes out a payday loan in the amount $1500 with a payday loan company that charges an APR of 12%. At a 12% annual percentage rate, the consumer’s loan will cost $180 per year in interest alone. This would be equal to $15 dollars per month in interest charges.
Let’s take our example a step further. With payday loans, the average interest rates charged are 391% to 591%. A consumer gets a payday loan in the amount of $1500 with an APR of 391%. With an APR of 391%, the interest charged on a $1500 loan would be $5865.
Yes, you have read this correctly. $5865 would be the total interest charged over 12 months. However, payday loans are generally two weeks long. Therefore, in the example, $1500 at a rate of 391% would cost: $244.37. As you can see, payday loans are expensive. By receiving $1500 at a rate 391%, this would mean a total repayment amount of: $1744.37
More APR Examples
Loan Amount: $500
- APR (Annual Percentage Rate): 391%
- Interest Paid Annually: $1955
- Monthly Interest Payment: $162.91
Loan Amount: $500
- APR (Annual Percentage Rate): 591%
- Interest Paid Annually: $2955
- Monthly Interest Payment: $246.55
The Truth in Lending Act requires that customers are advised the amount of interest rate will be charged over a year. This is important because a consumer could get a loan with all intentions to pay it within a short period of time.
However, if something happens that prevents the consumer from being able to pay, interest will still be charged. The amount of interest charge and limits on charged interest are disclosed within the loan disclosures. So what does it mean to disclose (disclosure)?
Disclose (disclosure) is the process of revealing. It is transparency.
With disclosures there are no hidden facts. All agreed upon terms are made readily available to consumers. This transparency helps consumers make educated financial choices based on supplied facts.
The Truth in Lending Act is essential for consumers. Consumer protection policies allow consumers to have access to information in order to make wise financial decisions. With the Truth in Lending act, this information must be disclosed to consumers so that they can make informed financial decisions.
Payday Loans- Other Options
Consumer that need access to immediate cash may have other options available. Depending on the amount that is needed, consumers will save interest payments by using funds from a savings account, using a credit card or borrowing from a credit union.
These alternatives options may not be available for all consumers. Poor money management skills may negatively impact a potential borrower’s ability to access more affordable borrowing options.
However, this does give consumers the opportunity to build a positive credit history. There are a variety of methods available to build positive credit. The fact remains that, secured credit cards are one of the most effective methods for rebuilding and establishing a positive credit history.
Help with Debts
Consumers who are experiencing problems managing debt have a variety of options available. When faced with not being able to pay debts,
consumers should contact the original creditor
immediately . Contacting the original
may open unknown options to make arrangements to pay debt at a later time. Consumer credit counseling is also a resource available for customers who are unable to honor their monthly financial obligations.
Regardless to how some people may hate payday loans, it will be virtually impossible to get rid of the payday loan business. The fact remains that consumers must take personal
responsibility for their own financial stability. This does happen when consumers begin to use credit wisely.
There are various consumer protection laws available designed to help consumers. However, consumer protection laws are not enough. Consumers must begin to take personal responsibility for their finances. Financial education seems to be a major area of opportunity for most people. Learning more about finances and how to best address emergencies, will save smart consumers a ton of money in interest.
With the need of personal responsibility, the fact remains that this is the land of the free. Being in the land of the free, consumers must have access to options. It is not “big brother’s responsibility to make decisions for consumers. Consumers must keep the right to decide to do business with a payday loan company.
- Payday Loans
- Payday Loans- Bank Teller Boot Camp
- Payday Loan Information
- LendUp Payday Loan Review
- Payday Loans at Money Mutual
- Secured Credit Cards
- Secured Credit Card Basics
- Credit Cards
- Credit Cards for Bad Credit
- How to Use Credit Cards Wisely
- Test Your Credit Card Knowledge