Payday Loans: Are They for You?
Brief Introduction to Payday Loans
“Have you fallen behind on your rent? “Need a car but have no money?”“In a financial bind and have nowhere and no one to turn to?” “Easy cash – no credit check!” These are typical emotional advertising ploys made by many payday lending agencies that offer short-term loans to help people who are in a financial pinch.
The business of payday loans is centuries old. It became a common lending system in the United States in the late 1800s when many workers were unable to get bank accounts. Payday loans, pawn broking, and check cashing were all vital forms of short-term loans to workers of the period.
Bizzee Explanation
Most payday loans are made by loan stores and internet companies, not financial institutions. They are short-term loans of about two weeks’ length, usually for a small amount of money that is to be repaid when the borrower receives his or her next paycheck.
The amount of a payday loan is usually fairly small, typically between $100 – $700, although some lenders will grant payday loans up to $5,000.
The process is fairly straightforward: write a check for the amount to be borrowed, plus a fee. The check is given to the lender who will cash it when the borrower is ready to repay. Internet payday loan groups process everything through electronic deposit and withdrawal. The consumer applies via a faxed or internet application form. The loan is direct deposited into the borrower’s bank account and electronically withdrawn (plus a finance charge) on the next payday.
Any Positives
When used on an extremely limited basis, a payday loan can help the borrower through a rough financial patch, such as an emergency repair. It should be paid back in full and on time.
Managed properly, a payday loan may be less expensive (overall) than the consequences of bounced check fees and overdraft protection programs.
Payday loans are usually easy to apply for and receive. Payday lenders do not run credit scores on applicants.
Interestingly, although payday lenders do not run credit checks, the repaid loan can help the borrower’s credit score because the lender reports loans repaid loan on time. Conversely, late or missed payments may negatively impact a credit score.
What About Negatives
Payday loans are usually extremely expensive. Payday lenders offset the risk of making loans to poor-risk borrowers by charging high/maximum amount interest rates; the APR may be several hundred percent. According to the Consumer Federation of America, borrowers could wind up paying approximately 426% APR on their payday loan, “but paying an APR above 1000% is not unheard of.”
When a payday loan is not paid on time, many lenders automatically renew the loan, withdraw the finance charge from the borrower’s bank account, and extend the loan for another pay cycle; they may not offer or give the borrower a reduction in principal.
Carefully review the contract before agreeing to terms. They are often crafted to be very one-sided with all the benefits to the lender: mandatory arbitration, an agreement not to participate in class action lawsuits, the borrower’s bank account(s) may be have to be kept open until all loans are repaid, and the borrower must agree not to file for bankruptcy. Some lenders also ask for “voluntary” wage assignments. Borrowers should also be aware that some payday lenders will not disclose the interest rate until after the signed application is received and processed.
A payday loan borrower can easily become trapped in a cycle of additional borrowing, automatic renewal and high interest rates. This cycle can become financially and emotionally catastrophic for the borrower.
Payday loans are illegal in nearly half of the United States. Consumers should check their state’s website before seeking any storefront or online payday loan.
Overall
Consumers are advised to explore every legal avenue for temporary funding before turning to the risks – and high cost – of a payday loan. Bizzee feels when it comes to obtaining a loan from an internet payday lender, be extremely cautious about transmitting personal and financial information by fax or internet to unknown companies.
Payday Loans in NJ
NJ is in a sticky situation. They are captured in the all over the country battle over whether to legalize payday lending. Although they have actually technically abolished it, their laws are not sturdy good enough or certain enough to completely eliminate the practice; numerous companies have discovered loopholes to run with.
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