What are payday loans?
A payday loans is a loans issued with short repayment periods and very high-interest rates. This loan becomes due at the borrower’s next paycheck. It is a method used by lenders to lend cash to workers in the United States when they are sure that the borrower’s payment will be soon.
The interest rates of the lenders can reach a high of 400% annually, which is quite expensive. The majority of the borrowers do not have many options of sourcing money. They may also have low credit scores.
The lenders have often defended the interest rates by stating that the borrowers are high-risk customers and the loans are unsecured.
How does it work?
The process of obtaining this loan is quite easy. Most of the lenders are easily accessible in centers, especially where the majority of the residents are unemployed, minorities or low-income earners.
The borrower walks into the shop with an identification document, a pay stub and a checkbook. The lender will then offer an amount that is payable by the next paycheck and quote interest rates of about $10 to $30 for every $100 borrowed.
Once the borrower accepts the terms, he has to make a post-dated paycheck to the lender. This check contains the chargeable fees, the interests and the full amount borrowed. There are instances where the lender may be provided with electronic authorization to withdraw the money directly from the bank.
In most cases, due to the financial status of the borrowers and their low pay, they are not able to meet the repayment period. They have to renegotiate the terms with the lenders for an extension of pay periods which also come at a fee. Some borrowers pay off the balances, then source new payday loans. It then becomes a cycle repeated all year round.
• These loans have minimal requirements. The lenders will only need proof of income, a social security number, an identification document and at times where necessary a bank account and details.
• They are quite easy to access as compared to other sources. The process of obtaining this loan is straightforward, and the approval is immediate. The availability of online payday lenders makes them accessible 24/7.
• This type of loan is unsecured. It is advantageous since the borrowers’ property cannot get seized to repay the loan in cases of defaults.
• The lenders of these loans do not consider the credit score of the borrowers since most of them are low-income earners, and in other cases, defaulters. They do not conduct hard credit inquiries and do not require a credit history.
• The loans are quite expensive with interest rates of up to 400% annually.
• For most of the low-income earners, it is easy to be entangled in a debt cycle since the process is too easy.
• The payday lenders do not report to the credit bureaus. It means that you cannot build a good credit score with them no matter how many times you borrow or pay on time.
• The loans are considered predatory. The lenders prey on those people with low incomes, minorities and the poor in the society.
Several states across the United States have varying laws on these loans. Most of these regulations aim at safeguarding the borrowers from unfair terms.
Other states, including the District of Columbia, have prohibited payday lending. Some of their reasons are the illegal practices of debt collection, high-interest rates and the rollovers which increase debt owed.
The loans may provide a way out to low-income earners, but regulations for safe practice and adherence should be revised and enforced.