In general consumer advocates are inclined to refer to payday
loans in the most hostile manner, terming the lenders as indulging
in loan sharking, among other things. However for the average
consumer who falls short on cash and lacks credit cards, payday
loans are seen as a handy solution despite the grave risks involved.
Payday loans or short term loans are essentially the offerings by check cashing centers as an alternative for consumers to access money in a hurry. However the fees and rates on payday loans prove to be much higher than the cash advance service on credit cards. In a typical example, a borrower hands over a personal check between $100 and 300 payable to a check casher. The fee is likely to be between $ 15 and $17.65 for every $100. The check is held by the check casher till the date of the borrower?s next payday which may vary from one week to one month.
The borrower now has to choose between cashing the check and rolling over the loan for which there is an additional charge. As a means of borrowing moiney, it can prove to be highly expensive alternative. Data compiled from payday lenders in different states reveal that the consumer is most likely to renew their payday loans repeatedly. To take an example, say you have taken a payday loan of $200, in which the term is 15 days and the fee is 17.5 percent or $35. After a fortnight has passed you find yourself unable to pay the amount owed. You then choose to roll it over for which you pay $35. You have thus paid fees amounting to $70 for the original sum of $200 which works out to an annual percentage rate of 457 percent.
In 1997 payday loans were granted legal status in California. At present,
19 states in the US have declared the practice illegal. The
argument offered by the payday loan industry is that theirs
is an invaluable service which enables consumers to get access
to short term money for crisis situations that arise. Various
financial institutions and lenders are dealing in retail financial
services that offer convenience at affordable rates. Thus the
consumer makes a rational decision in availing the facility,
making the business of payday loans very useful.
The fee charged by lenders for borrowers of payday loans is $15 for every $100 which appears reasonable enough. Take the example of a person in need of $300 for immediate car repair. Borrowing the amount from lenders will cost $45 in fees. Should the consumer pay the merchant a check of $300 which eventually bounces, he may be required to pay an overdraft fee of $35 to the bank, apart from a penalty for the bounced check of $25 to 35 to the merchant.
The financial service association of America compiled
some of the more obvious advantages of payday loans:
• Almost 92 percent of borrowers were convinced that it serves a useful purpose.
• Customers behave responsibly in using the service.
• 66 percent of customers use the loan either for unforseen expenses that crop up or to tackle a temporary reduction in income.
• 34 percent of customers use the loan for planned or discretionary services.
• A majority of customers belonged to the middle-income, middle educated young families.
But consumer advocates highlight other research findings that paint a negative impression of the service. Recently the Indiana Department of Financial Institutions conducted a study which revealed that the average customer of payday loans borrowed 10.19 times in the last 12 months. Such findings suggest that payday loans turn out to become a trap for customers, particularly due to the fact that they are rarely used on a one-time basis.
Lenders of payday loans admit that the risks are undeniable for those who borrow too often and extend their payday loans. Lending institutions are also considering devising methods for monitoring and advising clients against extending their payday loans after a certain extent. Meanwhile it is very likely that consumers in need of money will resort to payday loans whenever they feel the need for them. For example a 31 year old man in Oakland admitted having used payday loans twice for electric and phone bills when he didn?t have the money. He acknowledges that the payday loans did help but is also aware of the potential risks involved even after having paid them off by the due date.
Therefore availing payday loans this week with your paycheck expected next week, means paying them off without extending for another week. Failing to do so can trap you in debt.
To understand whether or not consumers fully appreciate the dangers of payday loans, one needs to consider whether they realize that it is a loan that they are taking rather than an advance on their paycheck. A lot of customers get into it without a proper understanding of how it works and bothering to find out how it is to be paid off. By the time realization dawns, it is too late and they are already waist deep in debt. The term payday advance being used to refer to payday loans in the industry for marketing purposes, deceives many customers about it not being a credit transaction.
Many customers are also ignorant about the legal implications involved in the event that they fail to honor the transaction by repaying it on time. Defaulting on a loan is usually not considered a crime. However the security for payday loans is a post-dated check that the lender keeps until the customer?s pay day. In many states it is a crime to write a check despite being aware of insufficient funds, which makes customers vulnerable to threats of criminal prosecution by the lender.
Customers may also lack the understanding that at times they are giving payday loan lenders the right to electronic debit from their checking account for fees and interest charges. Or they may not realize that this is optional. The Electronic Funds Transfer Act makes it illegal to electronically access an account as a condition for granting credit.
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