In order to make ends meet, more Americans than ever before are turning to payday loans companies that offer short term loans but which come with high interest and charges. However, delve beneath the sugar coated exterior that these lenders often portray in their advertisements, and you will find an industry that targets the poor, the desperate and in some cases, even the mentally ill.
Convenience Or Hindrance?
Most payday loans companies present themselves through advertising as a quick and convenient way for people to cover the cost of unexpected bills or emergencies. Yet a very revealing report from pewresearch.org, states that it is more common for users of payday loans to use the money to pay for everyday expenses, such as grocery shopping and fuel bills.
The Workings Of A Payday Loan
One of the reasons why people rely on these short term loans is that they need money fast, and they think that there is no other way to get their hands on the money, short of turning to crime. For that reason, most of these instant cash lenders tend to target the needy and the vulnerable, especially those people living in poorer inner city areas, as these are areas that are less likely to be served by the mainstream banks. Also, they know it is people living in these kinds of areas that are going to be in most need of short term loans.
What The Lender Expects In Return For The Money
Many payday loans companies advertise their loans as being free of any credit checks, and that is one of the major factors in why people decide to make use of them. However, as easy as it is to acquire one of these short term loans, there are a few things you need to understand about the whole loan process.
- The lender will expect you to prove that you are in employment, and this will typically consist of your employer details, as well as letting them see a bank statement.
- They will insist on either a pre-dated check for the full amount, which is the amount of money you are borrowing, plus interest and fees that will be charged.
- If you are applying for a loan through an online payday loans company, then they will want your bank account details, as well as your debit card details, in order to take their payment.
- As these loans are only for a few weeks, unlike other loans where you can pay a bit back each month, you will be expected to pay the full amount, plus interest and charges in full on the due date.
- If you feel you will not be able to meet the repayment date, you can ask for an extension, however, fees will be charged, and some companies may even expect you to pay off a percentage of the debt first.
Falling Into The Debt Trap
Consumer experts have, for a long time, stressed the importance of not falling into what has become known as the debt trap. The debt trap is when you take out a loan, only to find that the repayments use all of your disposable income, meaning you have to take out yet another loan in order to see you through to your next payday.
Payday Loan Companies Are Opening The Trap Door
All forms of borrowing come with inherent risks, but unfortunately, one of the main reasons why people end up in the debt trap is through short term payday loans, and they do this on purpose. Most of the major banks weigh up the risks of lending money to a person, and if that person’s credit rating does not match up to the requirements, no loan will be offered. Payday lenders do not take that approach, and in fact their business plan is to target people that they know will have problems paying the loans back. They bait the trap with promises of a credit check free application and good rates of acceptance, however, the interest and fees on the loan can be so high, that the borrower either asks for more time to pay (incurring more fees) or else they have to take on another loan. The repayments on a simple loan of say $200 can quickly put a borrower in a position where they are paying back almost twice that amount when interest and fees are added.
Incurring Payment Extension Fees
When a borrower discovers that their finances will not allow them to pay back the full amount by the due date, they can ask for a payment extension, however, this is typically incurs a pretty hefty fee, by the time that they eventually pay the loan back, they will be in such financial difficulties, that they will have to take out additional payday loans. That is when they will have been caught in the debt trap, either paying payment extension fees on their initial loan, or by having to take out another loan because their bank account has been cleared out by the repayments of the initial loan.
Misleading Their Customers
Many companies offering fast payday loans often try to mislead their clients by advertising their fees and interest charges in dollars instead of the normal Annual Percentage Rate (APR). At first look, a fee of $50 on a loan totaling $500 for a loan period of two weeks, does not sound too bad, however, it is only when you study it more closely that you will realize that the APR would be over 250% higher than you would expect to pay on a bank loan or credit card. It is at that moment, when you should realize that applying for a payday loan is a very bad idea indeed, and although they can look tempting, especially if you are struggling with your bills, at the end of the day, you are just adding another bill to the pile. It is much better to try and find alternative to payday loans.
How You Can Avoid The Payday Loan Debt Trap
There is no disputing that at this moment in time, money is tight for a lot of low and middle income families right now, and it may be tempting to contact a lender who can offer you a short term loan to cover your bills. However, as tempting as this is, there should be no doubt in your mind that contacting a payday loans company, should really be your last refuge. Try to find ways that you can save money, by cutting down on things you do not need, you will be surprised by just how much money you can save each month. Walking to the local store and buying only what you need is going to save you money on your groceries as well as fuel money by not driving out to the supermarket.
Friends And Family Can Help Too
Sometimes, in a real financial emergency, it is not uncommon for friends and family to offer to help you financially, however, there may be times when they do not realize how difficult your financial situation has become, and you may need to ask them to help you out. Unfortunately, a lot of people would rather go to a payday lender than to a family member or close friend for help, and then ironically end up asking them for help to get out of the debt trap.
Try And Put Money Away For Emergencies
That may seem like a mad idea, putting money aside when you are struggling to pay your bills, however, if you manage to cut down on the things you do not need, as well as managing to adjust your outgoings to meet your income, then you may find that you have a bit of spare money at the end of each month. By putting that spare cash (no matter how small it is) into a savings account, you will soon start to see an amount of money that you can fall back on when you really need it in an emergency.
Payday loan companies will try to entice you, with promises of easy and instant cash, no credit checks, as well as presenting themselves as the solution to your current financial problems.
If you find your financial situation becoming a problem, do not rush out and commit yourself to a payday lender. Take your time and work out the best alternatives to the problem, such as cutting back on luxuries and other things you do not need. If you smoke cigarettes or drink alcohol, then try to quit, or at least cut down on the frequency, as these are two of the most expensive items people spend their money on.
Do what you can in order to avoid getting a payday loan in the first place, that way you can avoid falling into the debt trap of borrowing money to cover the payments you had to make on the initial payday loan, which may cause you to default and damage your credit rating even further.