Payday loan is a small or short term unsecured loan which many people take to pay off some of their expenses like a home rent or car insurance. Also known as payday advance these loans are also known as cash advances and rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the United States, between different states.
To prevent unreasonable and excessive rates of interest, some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. In the United States, the rates of these loans were formerly restricted in most states by the Uniform Small Loan Laws (USLL), with 36%-40% APR generally the norm.
Each year thousands of consumers contact the Credit Counselling Society for help due to problems repaying payday loans. Taking this loan or say borrowing a few hundred dollars to address a cash shortfall or an unexpected expense can seem like a good solution, especially if you don’t have access to conventional credit like a credit card, line of credit or an overdraft. But honestly the payday lenders many a times do not tell you the terms and costs in advance even when extending a loan,
Also as a loaner when you are facing a cash crunch, at that moment you focus on solving your financial issue rather than understanding the costs and challenges of taking out and repaying a payday loan. Here are five things you should know before you take a Payday Loan.
1. Understand the costs associated with a Payday Loan
In US the cost to take out a loan varies by state and by lender. States that allow payday loans typically cap the maximum allowable interest at between $10 and $30 per $100 borrowed. The cost of a loan from a storefront payday lender is typically $15 for every $100 borrowed, according to research from the federal Consumer Financial Protection Bureau.
At that rate, a $350 loan the amount of the median storefront loan costs $52.50. When it’s time to repay, usually in two weeks, the total amount owed is $402.50. Online payday lenders tend to charge higher rates and often claim exemption from state rate caps. The CFPB found the median online payday loan cost $23.53 per $100 borrowed.
However, most loans are extended. Nineteen of the states that authorize payday lending allow lenders to roll over a loan, in which case the borrower pays only the interest fee and extends the loan for two weeks. He then gets a new, second interest fee tacked on. The remaining states don’t prohibit a borrower from taking out back-to-back loans, which has the same effect.
Most consumer loans are clearly labeled by annual percentage rate, which includes the total cost of fees and interest over a year. That $15 per $100 fee for a two-week loan effectively is a 391% APR.
The majority of the provinces in Canada have legislation outlining the maximum charges a payday lender can charge. The rates are typically based on a maximum charge for every $100 borrowed and vary from $22 to $15 on short-term/payday loans.
Paying $75 for a $500 loan may seem like a good option when you are faced with a financial emergency, but the reality is that the annualized interest rate on a loan with charges of $15 for every $100 borrowed is almost 400 per cent. So payday loans on a short term or one-time basis this may be a viable option for some people, but on a longer term basis this is a very expensive form of credit.
2. Beware of the Payday Loan Cycle
Payday loans are a pack of triple-digit interest rates and critics say that borrowers often end up trapped in a cycle of high-cost debt as a result. Though the Consumer Financial Protection Bureau prepared a framework of proposed rules to regulate payday lenders and other costly forms of credit. A payday loan cycle may go on for months until a person is finally in a position to clear the loan; unfortunately, they will have paid hundreds of dollars in charges in the process. So think if you are running short of funds during a pay period or don’t have the savings on hand to deal with a cash crunch, are you really going to be able to repay your payday loan in full, along with the borrowing charges, without running short of funds again. The answer to this question for a lot of people is ‘no’ and they find themselves getting caught in a cycle. They pay off their current payday loan and then have to take out another loan to cover their spending shortfall until they get their next paycheque two weeks later.
3. Single Payday loan can become multiple of many
If you’re not managing your income and expenses with a budget and find it necessary to use payday loans to address spending shortfalls, the charges associated with payday loans can eat up a sizable portion of your paycheque over time. This can lead to taking out another payday loan on top of an existing payday loan to make ends meet in the short term. While there are laws that prevent a payday lender from providing a customer with more than one payday loan at a time, there is nothing stopping a consumer from going to another payday lender for a loan.
As there isn’t a centralized database where payday lenders would be required to check that a potential customer does not have an existing payday loan before advancing them a new loan. Most payday loans don’t show on a credit report. When consumers are managing multiple payday loans they may find that their situation goes from bad to worse in a very short period of time.
4. Seek assistance to solve your Payday loan and help to clear your debts
If you’re having trouble repaying a payday loan or are caught up in a payday loan cycle, contact the lender to get payday loan help and make arrangements to extend the repayment of the loan. Many states or provinces require payday lenders to offer extended repayment terms without penalty to the consumer. If you are not sure what the laws are for your state contact your provincial consumer protection department for assistance.
As laws governing payday loans vary from state to state. Some states, like Colorado, are currently working to change the way payday loans are administered in order to make it easier for customers to pay loans back and avoid the snowball effect of constant loan renewal. Other states require payday lenders to offer borrowers an Extended Payment Plan (EPP), which stops the accrual of fees and interest.
Here are some of the options available to get rid of payday loan debt:
- Extended Payment Plans (EPPs): If you borrowed from a lender who is a member of the Community Financial Services Association of America (CFSA), then you are lucky. CFSA’s Best Practices allow a payday loan customer the option of entering into an EPP. This means you’ll have more time to repay the loan (usually four extra pay periods) without any additional fees or interest added for that service. Best of all, you won’t be turned over to collections as long as you don’t default on the EPP.
- Credit Counseling: If an EPP isn’t an option, you may want to talk with a credit counseling agency. While credit counseling agencies spend their time helping consumers get out of debt, these kinds of loans can present unique challenges. As it’s not a traditional loan with set guidelines in terms of how they work there are things a credit counseling agency can do to help you get out of payday loan debt:
- Restructure the payback: Also payday lenders who are members of the CFSA “seem to be more lenient” and are “more apt to try to work with people.” Those lenders will often “restructure to pay back (the balance) over six to twelve months when coming through their program.” But this applies in only about 40–50% of the payday debt situations clients are dealing with.
- Negotiate a settlement: If restructuring the payback terms isn’t an option, the credit counseling agency will try to work with the lender to determine a settlement amount that will resolve the debt altogether. If you can pay off the loan with a lump-sum payment, the agency may be able to settle the debt for a percentage of the outstanding amount.
- Adjust your budget: If no other options are viable, the agency can work with you to come up with a budget that will help you find the money to get the loan paid off. Sometimes that means reducing payments on other debts, consolidating debts, or reprioritizing other expenses.
5. Finally ask yourself why you need a Payday loan
Before taking out a payday loan or any form of credit, stop and ask yourself why you find it necessary to borrow the funds. Is it for an unforeseen expense that has just come up at a bad time financially, or is it because of more a serious situation. Often times, a payday loan, a credit card cash advance or using other forms of credit is just a symptom of the real problem. If you don’t address and solve the real problems that are causing you to rely on credit, you may find yourself in a never-ending cycle of getting in and out of debt. So tackle the real cause that leads you to demand such loan.