In the current economic climate, alternative means of obtaining
money to make ends meet are becoming increasingly necessary. Some
alternatives include borrowing money from friends/relatives; cash
advances from employers; pawning personal effects and payday loans.
Also known as a check/cash advance loan or deferred deposit check loan,
the payday loan is the most popular among these. As payday loans grown
in popularity, more and more people want to know just what a payday loan
is, and if it is the right solution for their situation.
SO, WHAT IS A PAYDAY LOAN?
A
payday loan is an unsecured, short-term loan of anywhere from a few
hundred dollars to as much as fifteen hundred dollars in some instances.
A borrower generally secures the loan by post-dating a personal check
for a specific amount of money to be posted against their account on
their next pay period. Payday loans are designed to help out in
situations when you need quick cash to cover an unexpected bill or an
emergency situation until your cash comes through or is made available.
A
payday loan is NOT a revolving line of credit. It is short-term and
that is a key factor in this type of loan. The idea is to take out the
loan to cover a small bump in the road or to smooth out any rough
financial edges until your next payday. If you are thinking of the
payday loan as way to repair a much bigger financial problem, the advice
is to STOP! A payday loan can create bigger problems down the road
when used as part of an overall troubled cash flow situation.
SO, WHAT IS A PAYDAY LOAN?
The
most important thing to remember about payday loans is that they must
be repaid on time in order to avoid paying insane fees that could
potentially equal or surpass the amount of the loan itself! It is the
renewing of the loan and failing to repay it on time that can create a
major financial dilemma for the borrower.
Most loans have a
repayment period of four to eighteen days depending upon the terms
negotiated with the lender. The repayment schedule and the method of
repayment is arranged at the time the loan is disbursed. More often
than not, the borrower will agree to pay the loan in full with cash on
or before the due date. Additionally, some lenders may opt to collect
on the loan by depositing the borrower’s post-dated check against
his/her bank account on a mutually agreed upon date.
With payday
loans, there is a fixed rate fee calculated into repayment on each loan
disbursed. The average rate is $15.00 to $20.00 dollars per $100.00
dollars borrowed. Due to the nature of the quick turn-around time of
payday loans, the annual percentage rate or (APR) is generally very
high. It is not uncommon for the (APR) to be 100%, 200% or even as high
as 400% in some cases.
If a borrower is unable to repay a loan at
the scheduled time, the lending institution may agree to rollover the
loan allowing more time for repayment. The drawback to rolling a loan
over is that additional fees are added to your account. For example, if
the fee to borrow $100.00 is $15.00 and the borrower rolled over the
loan three times, then the new fee would be $60.00. That is the
original $15.00 fee plus three times that fee itself added to each
$100.00 borrowed.
WHAT ARE THE REQUIREMENTS FOR A PAYDAY LOAN?
Generally,
the only major requirement for a payday loan is that you have a job.
Your job is your assurance that you will be able to repay the loan. It
is expected that you will be receiving a paycheck, and therefore, the
money to cover the loan. Good credit isn’t necessary or even required
for the payday loan to be approved. The lending institution only wants
to see that you are employed and have a steady income. In essence, your
job is your collateral
Getting a payday loan is actually a simple procedure.
You apply, and if approved, sign paperwork that indicates your promise
to repay the loan on the lender's terms. Be sure to take the time to
carefully read the terms of the loan and do not be afraid to ask
questions about what those terms mean. Often, these kinds of contracts
are written in a legalized, financial jargon that is not easily
understood by the average consumer.
BORROWER BEWARE!
If you
feel the lender's representative is not able to fully answer your
questions, please say so! If the terms of the loan are not clear to
you, do not take the loan until you fully understand them. Teachers
always say that the only stupid question is the one you don't ask. This
is true! Again, if you do not understand all the terms of the loan, do
not sign paperwork until those terms have been fully explained to you.
Otherwise, you are legally bound by those terms that could prove
disastrous for you if you fail to act in accordance with the terms of
the loan. We would like to think that everyone is above board, but not
all lenders are. Unfortunately, there are unscrupulous lenders out
there who intend to make a profit at your expense.
It has been
noted by the NAACP and the Department of Defense that payday loan
offices have strategically opened offices near military bases and in
socio-economically disenfranchised areas where the demographic is
largely African American and Hispanic. Many reputable financial
institutions, consumer groups, and civil organizations are doing all
they can to shut down payday loan offices, but their efforts to date
have been largely unsuccessful.
BORROW IF YOU NEED TO, BUT BE SMART ABOUT IT!
With
the often strict guidelines used by reputable lenders, many people are
getting caught up in the cycle of payday loans because of their
immediate benefits. When emergencies occur and cash is needed, payday
loan companies offer fast, hassle free cash. More often than not, most
have no minimum credit requirements and do not perform background
checks. In most cases, all that is needed to secure a payday loan is a
recent pay stub and proof of a checking account. In these regards,
payday loans and cash advances do offer consumers financial options in
emergencies. On the other hand, more and more people are getting caught
up in this vicious cycle of borrowing which can lead to financial ruin.
This is not good, especially considering that the loan was probably
taken out to avert a financial disaster in the first place. With pros
and cons like these, it would seem that the best advice would be to
borrow if you absolutely must, but do so with extreme caution.
Being
proactive is probably the best strategy or, as conventional wisdom
holds, "an ounce of prevention is better than a pound of cure". Take an
honest look at your family finances and come up with creative ways to
not have to borrow. Consider trimming the fat out of your budget,
pledging to save a little money from each paycheck, and reducing credit
card and revolving debt.
A little effort on your part can make a
huge difference not only in your financial situation, but in your
quality of life as well. Nevertheless, if you must take out a payday
loan, remember the following key points:
- Payday loans are NOT revolving lines of credit
- Repay your loan on time!
- Do not plan on rolling your loan over. Plan, instead, to pay it off
- The only "stupid" question is the one you don't ask
- Payday loans have terms & conditions of repayment. Know and abide by them
- Payday loans can ruin your finances and jeopardize your job if you are not careful
- An ounce of prevention is better than a pound of cure