Red Flags for Payday Loans
You have probably heard the horror stories of payday loans, but some bad apples have marred the reputation for what was meant to be a helpful, short-term fix in very sticky situations. If you are in a pinch and have been considering a payday loan -- but have been burned before or know someone who has -- make sure you have the following information to make an informed decision.
What is a Payday Loan?
A payday loan is a small loan granted to an individual and designed to be paid back with that person's next paycheck. It is basically like getting an advance with interest. With a payday loan:
- Terms are determined based on your paychecks
- The repayment period depends on how often you get paid
- You need to provide proof of income (usually a recent paystub and bank statement)
Once qualified, you're then required to give the lender a post-dated check for your loan amount plus any fees. The total amount can't exceed your paycheck amount.
In some states, the check legally must be dated for the day money is received. In this case, you need to sign a contract where both parties agree the check won't be deposited until a future agreed-upon date. This became necessary when a number of states outlawed post-dated checks.
D-Day
In the world of payday loans, D-Day is "deposit day." When the loan comes due, the lender is legally able to deposit the check. However, in the case that the loan can't be repaid at that time, it can become extended -- this is where many borrowers can get into trouble.
Very high fees are often tacked on at this point, which can lead to a downward financial spiral for the borrower. Some of the worst case scenarios include:
- Borrowers getting charged with check fraud
- Criminal prosecution
- Harassment by the lender
- Borrowers feeling "forced" to get another high interest loan, such as a car title loan, in order to pay
The Red Flags
Payday lenders are not doing anything illegal. However, with finance charges ranging from 15 to 30 percent, all in less than a month-long period, that is the same thing as getting an APR of 800 percent. Would you get a credit card with an 800 percent APR?
Some of the complaints anti-payday loan critics tout include:
- Unbelievably high interest rates
- High fees
- They're easy to get, and thus "prey" on low income borrowers
- They target those in financial hardship
- It "traps" borrowers in an endless cycle of borrowing since once the loan is paid off, they're in the same situation
Alternative to Loans
Payday loans should be a last ditch effort simply due to the interest rates. Exhaust all other resources first. Some ideas may be:
- Getting an advance from your employer
- Asking family or friends for a loan
- Getting a credit card advance if the rates are semi-reasonable
- Pawning items at a shop or selling them on Craigslist
Choosing a Reputable Payday Lender
If none of the alternatives are available to you, make sure you do your research and choose a reputable lender. Peruse online reviews, but know that given the relationship between payday lender and borrower, it's normal to see a higher level of complaints. Look to see if the complaints are legitimate or simply from a borrower who's blaming a lender for tough times.
Signs of a quality payday lender include:
- A company with clear terms listed
- Lenders that require hard proof of income
- Lenders that offer extensions and clearly state the terms
Payday loans can be lifesavers, but only if you are confident that that you've found a reputable lender and can avoid steep interest rates and harsh terms. To learn more, or to apply for a payday loan, visit 1stchoicemoney.com as soon as possible.