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BillSavings.com BlogPayday Loans Spike in the Tough EconomyThe Down Economy: A Boon for Payday LendersPosted By Mindy
BillSavings.com Brief:
Lots of people are short on cash in this tough economy and many are turning to payday loans. Learn the pros and cons to doing so.
The tough economy has seen countless people struggle through the past year. The housing bubble burst, unemployment spiked, and bankruptcies skyrocketed. In fact, around 2600 Americans have been filing for bankruptcy every day! It’s been rough, to say the least. But for those hanging on to a faint glimmer of financial hope, the opportunity provided by payday loans has brought a sort of refuge, albeit a risky one. It’s a fact that Americans are increasingly turning to payday loans for a financial quick fix in the tough economy, which can either be a saving grace or a money trap. Read on to find out why. What is a payday loan? Basically, a payday loan is an advance on your paycheck. If you’re in a bind and you need money before your next paycheck gets cut, payday lenders will give you cash up to the amount of your total check. The benefit for them doing so is because they can charge you a hefty interest rate and because they demand repayment within a short time period – sometimes as little as two weeks. These loans tend to be used most by people in the low to middle income brackets. Many folks in these groups consider payday loans to be an enormous benefit. Payday loans also offer ready access to cash for individuals with low credit scores who can’t qualify for any other type of loan. You can walk out with cash – sometimes hundreds of dollars worth – in as little as fifteen minutes. Payday lending is a HUGE industry Believe it or not, payday lending stores in the United States outnumber Starbucks and McDonald’s stores combined. In total, there are approximately 23,000 payday lending stores scattered across the country. Put together, they make up a $59 billion per year industry. Who uses payday loans? On average, 19 million American households take advantage of payday loan services annually. The typical customer will take out eight payday loans in a given year. Payday loan customers also tend to have existing debt, no savings, and little education. What to watch for Because of the risks payday loans can pose, it’s important to know how to differentiate a reputable lender from a slimy one. For starters, look for places that are upfront about their terms. You also want a lender who requires you to look through and read all paperwork before signing anything. If you need to take out a payday loan, watch out for “incentives.” Some lenders will offer different types of deals, such as giving you a bonus free loan if you take out three full loans. This may sound like a good deal initially – especially in our culture of bargains and discounts – but the reality is that it’ll cost you a lot more in the long run. Think three times the interest for the single loan you initially wanted to take out. Can a payday loan be a trap? It’s a simple as this: payday loans pose a trap for people who aren’t able to pay off the initial loans they take out. Just as credit cards can trap consumers in a constant cycle of spending and owing, so do payday loans “trap” people who aren’t able to pay the terms of the loan. Say for example you sign on for a $500 payday loan (so a $500 advance on your paycheck). You’ll then owe the lender $500 plus interest, likely due within a short time frame – anywhere from four days to two weeks. Let’s say then that you pay off your loan once you get your next paycheck, but because you owed interest on the loan you have to take out a little more from your paycheck. This leaves you short on basic living expenses, so you sign on for another payday loan. Scores of people find themselves in this type of bind, though most fail to realize that it’s largely self-inflicted. To be sure, payday lenders offer an easy avenue to money when you’re short, but you have to agree to their terms in order to qualify for the loan. The real problem: lack of awareness The thing about payday loans is that they’re actually very transparent. You won’t find hidden fees or surprise charges. Everything the customer is expected to pay is listed in the loan documents signed by the customer. Unfortunately, most customers don’t take the time to read the fine print of the loans they’re signing. Those who do read the terms don’t always understand the details and usually fail to ask for clarification. What to look for Payday loans and lenders have increasing amounts of regulation in the interest of consumer protection. Some states now cap the interest rate payday lenders can charges while others are extending the repayment period. Before signing on for any payday loan, be aware of the regulations present in your state. When you approach a lender, ask whether they adhere to the regulations. If they don’t know what you’re talking about, you should tuck tail and run. Alternative options If you find yourself short on cash, know that payday loans aren’t you’re only option – even if you do have bad credit. Consider borrowing from family or friends, or rework your budget to cut out unnecessary expenses. Sell unneeded items to a pawn shop or seek credit counseling services. If all these options fail to get you the cash you need, visit a payday lender with your eyes wide open. Be aware of the terms you’re signing on to and pay your loan back on time. Above all, limit yourself to the single instance of needing a payday loan to prevent getting trapped in an unfortunate lending and paying cycle.
Category: Mortgage & Loans 11/11/2009
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