Sometimes people get into a heavy cash crunch and they urgently need to raise money quickly. It can be an emergency car repair, a check that has been bounced or a bill that absolutely needs to be paid – in a month when they have a maximum on their credit cards. That is when it is easy to stumble into the not-so-hidden world of flash credit and there is a risk of falling into debt considerably remarkably quickly.
What exactly is a payday loan? Payday loans are loans that are issued for relatively small amounts (usually less than $ 1, 000) for short periods. The idea behind a payday loan (also known as a “cash advance” or a “check loan”) is that it gives you some money to transfer you to the next payday, with the idea that you will use your future salary to to pay it off.
The payday loan industry is now $ 38.5 billion in the market, according to the Wall Street Journal, especially in the 32 states that don’t cover how many lenders can charge (see In which states are expensive payday loans illegal? ). And it’s about to be hit by a new set of regulations from the Consumer Financial Protection Bureau (CFPB).
The proposed rules
Payday loans usually have an average annual rate of around 390%, according to the CFPB. Loans that are not repaid quickly can be balloon-flying to hefty multiples of the original sum, with more than four in five loans for one-off payments being consulted again within a month, with additional costs.
The new rules would impose a “full payment test” whereby the lenders must establish that the borrower can afford to make the payments while still paying the basic life costs and other costs, making it more difficult for lenders to refinance the original loan and fines to arrange. Click here for details.
Consider the costs
Payday loans usually require access to your checking account to deposit the loan and later to access the repayment funds. They are a way for people with low credit (or no family or friends they want to tap) to get quick access to money in no time – it usually takes just a few hours to a few days to get the loan approved to get.
Despite the speed of getting money in an emergency, flash credits are not a good financial decision for many reasons.
Although the CFPB study found an average annual percentage (APR) on payday loans of 391%, this can go up to 2100% (yes, you read that number correctly). For comparison: the highest APR that is allowed for credit cards is 29.99%. When you borrow money, you should always borrow from the source with the lowest APR that is possible; this lowers the amount that you pay in interest.
Calculating the amount of interest that you pay is not always so clear. To start with, an APR is calculated on an annual basis. A typical payday loan takes one to four weeks and the costs are not given to you annually. In fact, payday providers can refer to the cost of borrowing money as a “fee” rather than as interest, making it seem like it is something you have no control over. Comparing apples with oranges masks how much you pay for a payday loan compared to other money sources, such as credit cards.
How they work
This is how a payday loan works: you pay a “fee” for borrowing money at a fixed interest rate. This fee is usually between $ 15 and $ 30 for every $ 100 borrowed. This sounds reasonable – only 15% to 30% – but because it is for a short period, the ownDave Brandstetterijk is much higher than a credit card fee for the same amount. If the payday is complete and you cannot afford to pay the original loan plus the costs, you can “flip” the loan for a different fee. This can mean snowball spending for the consumer. The goal of a company with a payday loan is to keep making money – a lot.
According to the Consumer Protection Agency, 82% of loans are converted within 14 days and half of all borrowers pay more in fees than they had originally borrowed.
To make matters worse, if the borrower has provided a bank account number to the lender, the lender will automatically withdraw the amount due, sometimes in multiple withdrawals with a fee for each withdrawal. If the money is not in the account, you pay the rollover costs and you also pay bank fees for the current account.
There are many loopholes in the payday loan and little protection for consumers. Many states set limits for loan sums, but do not limit the opening of 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 US Army have some protection under the Military Lending Act. Military officials for active purposes, their spouses and some dependents have an APR limit of 36% and they are protected against paying more fees due to rollover costs.
Although there are still many brick-and-mortar payday loan centers, many payday loan operations have gone oDave Brandstetterine. This has created many opportunities for scams that are difficult to repair. If you think you are the victim of a scam loan scam, contact the Consumer Finance Protection Bureau to file a complaint.
Alternatives to payday loans
Although the prospect of fast cash for a fee can be attractive, it is almost never worth the risk of being caught in the value day. Although some websites advertise payday loans as a way to build up your credit, it is an expensive and risky way to take. Before you take out a payday loan, ask yourself: “If I cannot pay my expenses with my current salary, there is a reason why I can repay a loan plus expenses – and cover my normal expenses – when I complete my next salary?”
If you say no, consider a few alternatives to a flash credit:
- As mentioned earlier, the credit card interest rate is lower than the one you pay for a payday. If you have access to cash or credit card advances, choose those funds over flash credit. See if you can open a new credit card or increase your limits for current cards.
- See if you can get a small loan from a banking or credit union Small and short-term loans have become more common because banks and credit unions offer alternatives to payday loans for their customers.
- For fast cash you can sell part of your assets or take a part-time job (you can even retype a night of babysitting.) See Make money quickly from the new ‘Sharing Economy’ for a number of other ideas.
- If you routinely fail to make your money last until the next salary, make a budget and reduce your expenses.
- To prevent you from getting into trouble in an emergency, you must build an emergency fund so that you do not have to take out loans for unexpected expenses.
- If you already have a payday loan, you will receive a debit balance protection in your bank account.
The bottom line
Borrowing payday loans can be an expensive cycle that is difficult to break. 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 costs. If you have debts and are struggling to make ends meet, consider getting financial advice to find a way out of your tight circumstances.
The new rules will cover flash loans, car loans, prepaid products and certain expensive and open-end loans. Comments on the new rules are expected on September 14, 2016 and “will be carefully considered before the final rules are published,” the CFPB said. Click here for different ways to submit comments.