The way it is, most people who resort to payday lenders for loans are worried. The stock market may have been rising lately, but the general economy and job markets remain uncertain.
Many believe they have little choice when it comes to short term financing. They are in urgent need of cash, but have questionable credit histories and don’t care to deal with complicated options. Many are attracted to the high-interest-rate loans offered by payday lenders.
The Community Financial Services Association of America (CFSA) reports that some 22,000 payday advance agencies in the USA grant Billions of Dollars in short-term credit every year to millions of borrowers. As examples of the scale of such lending, Starbucks has employees working in more than 16,000 global locations, whereas McDonald’s has twice as many sites. In a number of States, payday advances are discouraged and seen as illegal as a result of usury laws.
Once a payday loan has been granted by a moneylender, the borrower writes them a check for the loanable amount plus finance charges. The moneylender agrees to defer cashing the check until the client’s next payday, which for most people would be every two weeks. In return, the lender provides the borrower from $50 up to $500 in cash for the duration of the loan.
Payday lenders are repeatedly criticised in the media for costly charges and high effective interest rates. The typical payday loan imposes a fee of $17.50 for every $100 in lending. Current regulations permit moneylenders to charge up to 15% of the loanable amount, including loan fees.
As an example, for a consumer to borrow a net total of $100, he or she would have to issue a check for $117.62 or so ($117.625 less 15% equals $100). Most moneylenders will round off that interest fee of $17.62 down to $17.50. And yet, many borrowers would be stunned once they realise the full cost of the rates they are being charged.
As a borrower, it would seem that you’re being charged the equivalent of a 15% interest on the loan, e.g. $17.50 for every net $100 granted. However, people overlook the fact that such lending is typically for just two weeks and needs to be repaid the next payday. Yearly interest rates for typical two-week payday loans would translate into a stunning 456% APR, were these to be rolled over and their terms annualised. Sadly, bank overdraft charges have begun approaching these rates in cost.
Critics of these financing schemes hold that a payday loan is unlike a home or business loan, in that lending agencies do not assess an applicant’s cost of living or his ability to repay a cash loan. Lenders normally afford borrowers a two-week repayment schedule. This is often unrealistic, for it’s a condition that most borrowers are not able to fulfil. Besides, people who cannot repay their loans can always choose to roll them several times over and thereby assume extra debt.
There are other cheaper alternatives for small credit, though, as in the following:
Traditional Pawn Shop: You can secure cash against any goods you bring them, so long as the pawn shop can value it. You must leave the item as collateral that ensures repayment of the debt within months. The average loanable value is $80 and normally includes a low interest fee. You forfeit the collateral If you do not repay the debt on time.
Peer-to-Peer Financing: Online lending services, such as Prosper or Lending Club, enable individuals to lend to each another without relying on banks. Often enough, such services promote lower interest rates than those offered in conventional banking. Their platforms can also enable friends and family members to lend cash to one another via a more formal process that offers the assurance of written contracts.
Bank Personal Loans: A number of banks have attempted to lower risks for clients drawn to payday lenders. One such is the NC State Employees’ Credit Union (SECU), which provides short-term loans with 12% annual interest rates and $500 maximum lending limits. The facility requires borrowers to make repayment through direct deposits. It also places 5% of all clients’ loan proceeds in their savings accounts, which helps them avoid the dismal cycle of living from pay check to pay check.
Car Title Lending: These agencies let applicants borrow against the title of their car. If you own a car that’s been fully paid for, title lenders would offer personal loans of some $500 and with monthly interest rates as low as 3%, in certain cases.
Credit Cards: Assuming more debt using credit cards is rarely a viable long-term solution to cash flow problems. But relying on credit cards, even those charging 22% annual interest rates or higher, may be a good short term strategy if you desperately need cash to settle bills. Costly card fees can at times present a better option than the higher rates that payday lenders charge.
Alternatives are available that are can be better options for you than the high-interest-rate loans of payday lenders. These may involve creative ways of resolving your cash flow woes, but do prove that there’s little reason to turn to short-term loans with unfavourable terms.
There will always be other possibilities. Put some study and effort into financing options and you may discover sources of extra funds in your times of need.