Why are Payday Loans considered Predatory?
Payday loans are designed to be short term loans offered to people who need money to hold them over until their next payday. Many people find these loans fast and easy to borrow when they are in need of cash. While payday loans are fairly easy for anyone who has a monthly income to obtain, they are considered predatory lending because of their high interest fees and loan practices. The will sometimes encourage borrowers to take out the maximum amount of the loan. Typically, predatory lenders will require some form of collateral and may make the borrower believe that their ability to pay is greater than it really is.
Many payday loan companies make it extremely effortless for consumers to apply for a payday loan. They provide applications entirely online and some have instant approval. Some companies will offer you money in as little as an hour while some companies make a deposit into your bank account by the next day. If you apply for a payday loan in a store, you can walk out with a check in hand to cash at the bank. These stores require you to give them a post-dated check so that they can cash it on the date of your next payday.
Payday loan companies offer loans based on income and not credit history. The qualifications for payday loans are extremely limited making it easy for anyone with a job and direct deposit to obtain a loan. Most borrowers are low income with little or no assets. However, you must provide the loan company with your bank account information to allow them to automatically take out the full amount of the loan plus interest on your next payday. For instance, if you borrow $200, the interest fee can be as high as $60 making the amount of your payback $260.
Most companies however, will allow you to rollover a loan. A rollover is a charge that allows the borrower to pay a fee on the first payday to have the amount of the loan rolled over to the next payday. For example, if you borrow $200 but find out that you cannot afford to pay the whole amount, you can pay the $60 to roll over the loan balance to your next payday. However, on your next payday you will still owe the initial $260 as the balance does not get paid down. The $60 you will have paid just renews the loan, it does not pay the loan down. By the time you have rolled over the loan four times, you will have already paid the loan back. Unfortunately, you are still obliged to pay the original amount of $260 even though after 4 payments, you would have already invested $240 into the loan.
This practice of predatory lending leads many borrowers to struggle. In some cases, borrowers will take out multiple loans from different loan companies to repay their other loans. This vicious cycle of payday lending can eventually lead to consumers having their bank accounts closed due to bounced checks and multiple insufficient funds charges.
Payday loans can be convenient but very costly. Alternatives to these loans should be sought out before taking out a payday loan. Consider a payday advance from your employer first, borrow from family or friends, or sell items you no longer need or use using sites such as eBay or Craigslist. This can help you avoid high interest fees associated with predatory lending.