Sometimes people get into a severe liquidity crisis and urgently need to raise money quickly. It could be an emergency car repair, a check that bounced or a bill that absolutely must be paid – in a month when they are maxed out on their credit cards. That's when it's easy to stumble into the not-so-hidden world of payday loans and risk merging much deeper into debt remarkably quickly.
What exactly is a payday loan? Payday loans are loans issued for short periods of time for relatively small amounts of money (usually less than $1,000). The idea behind a payday loan (also known as a "cash advance" or a "check loan") is that it gives you some money to tide you over until your next payday, with the idea that you'll use your future paycheck to pay it off.
The payday loan now amounts to $38. 5 billion market, according to the Wall Street Journal, especially in the 32 states that don't have a cap on how much lenders charge (see in which states are costly payday loans illegal? ). And it's about to get a new set of regulations from the Consumer Financial Protection Bureau (CFPB).
The proposed rules
Payday loans typically have an average annual percentage rate of around 390%, according to the CFPB's. Loans that are not repaid quickly can balloon into hefty multiples of the original sum, with more than four out of five deposit loans being repaid within a month, incurring additional fees.
The new rules would institute a "full payment test," forcing lenders to prove that the borrower can afford to make the payments and continue to pay living expenses and other costs that make lenders more difficult. Refinance the original loan and regulate penalty fees. Click here for details.
Consider the cost
Payday loans typically require access to your checking account to deposit the loan and later access the repayment funds. They are a way for people with bad credit (or no family or friends to tap) to get quick access to cash in a pinch – it usually only takes a few hours to a few days to get the loan approved.
Despite the speed of getting money in an emergency, payday loans are not a good financial decision for many reasons.
Although the CFPB study found an average annual percentage rate (APR) for payday loans of 391%, it can be as high as 2100% (yes, you read that number correctly). For comparison, the highest APR for credit cards is 29. 99%. When you borrow money, you should always borrow from the source with the lowest possible APR; this will reduce the amount you pay in interest.
It's not always clear how much interest you'll have to pay.For one, an APR will be charged annually. A typical payday loan lasts one to four weeks, and the cost is not given to you annually. In fact, payday lenders may look at the cost of borrowing money as a "fee" rather than as interest, which makes it seem like it's something you have no control over. Compare apples to oranges masks how much you pay for a payday loan compared to other sources of money like credit cards.
How they work
Here's how a payday loan works: You pay a "fee" to borrow money at a set rate. This fee is usually between $ 15 and $ 30 for each $ 100 borrowed. That sounds reasonable – only 15% to 30% – but because it's for a short period of time it's actually much higher than a credit card for the same amount. When payday comes and you can't afford to pay the original loan plus the fee, you can "roll over" the loan … For another fee. This can increase the cost for the consumer. The goal of a payday loan company is to make money – lots of it.
According to the Consumer Financial Protection Bureau, 82% of loans are remitted within 14 days, and half of all borrowers pay more in fees than they originally took out.
To make matters worse, if the borrower provides the lender with a bank account number, the lender will make an automatic repayment of the amount owed, sometimes in multiple withdrawals with a fee for each withdrawal. If the money is not in the account, you pay the rollover fee and you also pay overdraft fees.
There are many loopholes in the payday loan business and few protections for consumers. Many states set limits on loan transitions, but do not limit opening a new loan on the same day the old loan is paid off. Some states have a 24-hour waiting period for new loans, and some states have no restrictions at all.
Members of the U.S. Military have some protection under the Military Lending Act. Actively employed military members, their spouses, and some dependents have a 36% APR cap and are protected from further charges by rollover fees.
While there are still many back-and-mortar payday loan centers, many payday loan operations have moved online. This has opened many opportunities for scams that are hard to fix. If you think you are the victim of a payday loan, contact the Consumer Protection Bureau to file a complaint.
Alternatives to payday loans
While the prospect of quick cash can be attractive for a fee, it's almost never worth the risk of getting caught in the payday loan trap. Although some websites advertise payday loans as a way to build your credit, it's an expensive and risky route to take. Before you take out a payday loan, ask yourself, "If I can't cover my expenses with my current paycheck, is there any reason I can repay a loan plus fees and cover my normal expenses – if I take out my next paycheck?"
If the answer is no, consider some alternatives to a payday loan:
- As mentioned earlier, credit card interest rates are lower than for a payday. If you have access to credit or credit card advances, select these resources over payday loans.See if you can open a new credit card or increase your limits on current cards.
- See if you can get a small loan from A bank or credit union.Small and short-term loans have become more common as banks and credit unions offer alternatives to payday loans for their customers.
- For quick money try to sell some of your stuff or take up a side job ( Even a night of babysitting can swamp you. Make quick money from the new "sharing economy" for some other ideas.
- If you are routinely unable to keep your money until the next paycheck, make a budget and reduce your expenses.
- To avoid getting into emergency situations, build up an emergency fund so you can take out loans for unexpected expenses.
- If you already have a payday loan, get overdraft protection on your bank account.
The Bottom Line
Payday loans can be an expensive cycle that's hard to crack. The industry is designed to take advantage of people with limited resources, and the consequences of taking out a payday loan can be many times more expensive than the initial cost. If you are in debt and struggling to make ends meet, you should seek financial counseling to find a way out of your tight circumstances.
The new rules will cover payday loans, car title loans, deposit benefits and certain expensive installments and outstanding loans. Comments Off on New Rules are due on 14. September 2016 due and "will be carefully considered before final regulations are issued," the CFPB said.