We've all seen the commercials on television or heard them on the radio. Payday lenders often have catchy jingles or flashy graphics advertising easy money with no credit check. Initially, they may seem like a good idea and a viable solution to a period of financial difficulty.
Company policies and procedures vary, but the basic premise is the same:
- Walk into a payday lending location (or log on to their website)
- Provide proof of your income (usually in the form of a recent check stub)
- Give them either a post-dated check or your bank account information so that it can be debited when the loan is due
- Walk out with the funds
These loans are usually for relatively small amounts, just a few hundred dollars, and are ideally only a one-time bridge to get you out of a financial jam. There is no credit check necessary, as the proof of income is considered collateral for the loan.
Beware the interest!
Once you look into the "fine print" of these types of loans, though, you'll see that they are indeed too good to be true. The dark side of payday lending reveals the truth about an industry rife with usurious interest rates, illegal collection practices, harassment, and a cycle of debt nearly impossible to escape.
The short terms of these loans make it difficult for the target demographic - low-income earners who have very limited financial networks on which to rely - to repay them. Low income borrowers often have very little financial "wiggle room," which is why they come up short economically in the first place. Throwing in the additional expense of loan repayment in a week or two, complete with fees and interest, can be nearly impossible to fulfill.
The biggest single red flag about these types of loans, however, is their extremely high interest rates. Most payday loans have a term of a week or two, and an interest rate of between 15 and 30 percent; amortized out to a term of a year, that would equal an annual percentage rate (APR) of up to 800 percent. Compare this to credit cards, many of which are already alleged to have unfair interest rates, that are capped out at less than 30 percent APR.
If you can't repay the loan, you will find that the lender is often amenable to rolling over the loan into a new term, complete with new interest and origination fees. This cycle of debt can continue somewhat indefinitely. A loan that should have taken two weeks to repay, for an overall cost of $350, can result in years of fees, collection harassment, fear, and a total of thousands of dollars.
In many instances, the need for a short-term financial solution like this is indicative of a much bigger economic issue. You may have resorted to a payday loan because your credit cards are maxed out. You might have a sudden medical emergency that has forced you to cut your hours at work and rack up bills. A divorce could have resulted in sudden expenses, legal fees, the need to relocate and more. If your money woes are consistent, you might want to strongly consider whether a bankruptcy filing is actually a better solution.
Contact a local bankruptcy attorney today to learn about debt management options.