Payday loans are a perpetual trap that many American families rely on to make ends meet every payday. Many families’ incomes fall short within that time frame, and they have a hard time providing just the necessities.
To make up for this shortfall, may families take out a “quick” payday loan, in which they borrow a small amount of money that must be paid back by their next payday. However, these loans are laden with finance charges and costs that cause the borrowers to sink deeper and deeper into debt. Consumers are rarely able to pay back the loan within the two weeks. Actually, many consumers believe that they will be able to repay the loan within the two-week time frame with no problem.
Initially, it sounds like a good idea. The consumer borrows money to tide them over. In two weeks, they make the minimum payment, say $50. They feel like they are making progress on their loan because they made a payment. But in actuality, they total amount is the principal, plus the $50. Each minimum payment made is merely an extension of time to pay the debt, with fees continuing to incur every time a small payment amount is made.
Another downfall regarding one of these types of loans is that consumers rarely completely understand the terms of the loan. Many payday lenders advertise an interest rate of $15 per every $100 borrowed. This sounds like a great deal, especially considering that most credit cards charge an average of 20-plus percent in interest. In actuality, that’s a very high rate. Consider a loan of $375 with a fee of $55. If you were to roll over that loan for an entire year, you would pay over $1,400 in fees. That’s almost four times the original loan amount.
One reason consumers choose payday loans over other lending options is the lack of knowledge that other viable options exist. For example, many consumers do not realize that many banks offer similar products as payday loans, but at a much better rate. Some banks offer a product called a deposit advance loan, which charges between $7.50 to $10 per $100 borrowed, compared to the $15 per $100 borrowed that most payday loan companies advertise.
The government is attempting to impose stricter requirements on payday loan businesses practices, particularly when it comes to substantiating the debtor’s salary prior to authorizing an extension of credit. Some states restrict payday loans by putting a max on the number of times a borrower may borrow per year. And, some states have placed limits on the maximum annual percentage that can be charged. Unfortunately, some states are not doing as well when it comes to placing limits on these payday loan companies.
There are currently state laws administering checks and balances against these payday loan companies, but the federal government wishes to become a watchdog for the American people as well. The federal government believes that it is common sense for a lender to verify a potential borrower’s income before approving a loan. The federal government believes that these loans are bad news and need to be closely watched and monitored.
These new regulations would apply to those companies presenting themselves as payday loan companies, as well as car title loans. These companies force the debtor to sign over their title to their vehicle as collateral in the event the debtor fails to repay the loan. Moreover, the borrower must pay the entire loan back in only 45 days. That is not much time to repay something in which such a high-valued asset is at stake. As with payday lenders, car title lenders would be required to certify the person’s income and ability to repay the loan.
Additionally, a mandatory waiting period would be enforced after the last loan. This would prevent the borrower from taking out another payday or similar loan within sixty days from their previous loan. And, reasonable payment choices would be mandatory, loans must be less than $500, and these companies would be disallowed from requiring a vehicle as a surety, or charge sequential fees.
Payday loan companies disagree; pointing out that too many people would lose access to any loans if these stricter rules and regulations were put in place.
So what are some other viable options for consumers who may need a short-term boost to their income? Some suggestions are obtaining a second job for a short period of time, performing miscellaneous side jobs, or if push comes to shove, borrow money from a friend or relative until your finances can smooth back out. Payday loans and car title loans are extremely risky and high-cost, so use these financing methods as an absolute last resort. The government is doing what it can to watch out for the consumer, but we must also be our own advocates. So, do your research on these loans and possible other financing options, and borrow responsibly.