Payday Loans Are Attractive But Carry a Huge Risk
Payday loans are a quick. easy way for a person to borrow money. The loans are for a short period of time and they are known for the high interest rates that accompany them.
To obtain a payday loan, the borrower normally is required to give the lender a personal check for the sum of money they desire to borrow. Usually there is an initial fee involved also.
A payday loan is for a small amount ($500 or less) and the borrower has to agree to pay the loan back when their next paycheck arrives
Lenders require that a borrower provide proof of gainful employment. The person seeking the loan must also have an ID and bank account.
These loans are sought by desperate people who have a poor credit rating or no credit at all. It is a risky loan but it has become popular. Allegedly, there are more payday loan establishments in the United States than there are McDonald’s restaurants.
Statistics Show 12 Million Americans Borrow $7 Billion Yearly from Payday Lenders
The loans are so popular that statistics show every year 12 million Americans take out payday loans, borrowing a total of $7 billion.
The majority of those who borrow money from payday lenders are:
– Caucasian women between ages 25 and 44
– People lacking a college degree
– African Americans
– Those making under $40, 000 a year
– People who rent their homes
– Borrowers that are divorced or separate from spouses
Here is how a payday loan is made:
At a storefront business, the lender will check if the borrower qualifies for a loan. If the person seeking a loan does qualify, then he or she promptly receives the money. The process usually takes no more than 15 minutes.
A payday loan can be transacted online also. Money borrowed in this way is transferred to the borrower’s bank account via electronic transfer.
Payday loans have other names like cash advance, deferred presentment, credit access or deferred deposit.
If a person is successful in obtaining a loan, he or she is expected repay the loan in two weeks or a month.
Financial Experts Agree The Payday Loan, Despite Its Popularity, Is Too Risky
Professionals who make their living giving financial advice to clients have made it known that the payday loan should be avoided. The loans appear inviting, finance experts say, but the loans can get the borrower trapped in a pit of debt. It becomes quite expensive to get free of the debt.
A loan made for $100 with a storefront lender will normally costs $15. That’s $15 for every $100 borrowed! That’s like a 391 percent annual percentage rate, according to the federal Consumer Financial Protection Bureau’s research.
Making a loan online is even more expensive, the federal Consumer Financial Protection Bureau reports. The bureau says the average cost of a payday loan is about $24 per $100 borrowed, an annual percentage rate of of 613 percent!
It gets more costly if the loan is not repaid on time. Finance charges can mount and in months a borrower can wind up with a dismal debt. Research shows the average person who takes out a payday loan for $375 pays more than $575 in interests and fees.
There are several payday loan options to consider. The following are better alternatives:
— Borrow from friends or family
— Borrow from employer
— Borrow from credit union or bank
— Credit card
In summary, these loans are definitely a quick and easy way to obtain money. However, the risk they present to borrowers are potentially too costly. So costly, in fact, that they should be avoided if at all possible.