Your rent is due, yet you are unable to pay it. Perhaps your car broke down or needs new tires; you must fix it, but again, where will you get the money? Many people will turn to a payday loan, thinking that this will provide the solution. For a while, it seems to. The rent is paid, and you keep a roof over your head. Your car is fixed, and you keep driving too and from work. Problem solved, right?
Not exactly. That loan must be paid back, and lendees quickly find themselves in financial quicksand, unable to pay back their payday loans and in desperate search for payday loan relief.
What happened? Let’s take a look at why payday loans are, in fact, so dangerous when they seem like the perfect solution for short-term financial issues.
Payday Loans Are Very Expensive Due To High Interest Rates
You may be shocked at the average interest rate on a payday loan: 391%. Yes, you read that number correctly. Most of us wince at credit card interest rates that go over 9.99%, so how is it possible that a payday loan interest rate could be so exorbitant?
The culprit lies in the fee-based structure of a payday loan. These loans may be for the short term, but they come with high lending fees, making them significantly different from other loan types. Check out this article for an excellent description of how a 391% interest rate creeps up on the unsuspecting customer and ultimately leads them to seek payday loan relief.
Just how prevalent is payday loan debt? According to the Consumer Financial Protection Bureau, 80% of payday loans are not repaid within two weeks, so there are plenty of people who are struggling to pay off what was supposed to be a short-term solution to paying rent or perhaps an electric bill. Don’t be one of them.
Payday Loan Interest Increases Every Week on Remaining Balance
Most payday loans come with a two-week deadline, but many borrowers are unable to meet it. Of course, the lender will be more than happy to “roll over” the loan so that they can continue making money from the rising interest rate. The laws concerning this vary from state to state, but assuming it’s possible, the borrower will pay the minimum or the fees, and the loan is extended. However, the issue is that if you do not pay off the loan, the interest rate will grow as will any finance charges.
Borrowing Is Too Easy, So This Increases Debts Faster
Typically with bank loans or credit cards, you will fill out a lot of paperwork that clearly outlines your rights and responsibilities. Banks and credit card companies will also do a background check to make sure you are not a high-risk candidate for a loan or credit card.
With payday lenders, it’s true that not having to fill out so much paperwork can seem like a reason to celebrate. Ask yourself, however, why it’s so easy to get that payday loan. Answer: you have fewer rights with payday lenders than you do with banks or credit cards. Alarmingly, you also don’t have a right of rescission, meaning that once you give the payday lender your signature and accept the money, you can’t change your mind.
Some Payday Lenders Want the Right to Access Your Bank Account or Activate ACH
It has become the norm these days to set up automatic payments through online banking. This is fine if you’re in control of when and how much money comes out of your bank account. Consider, though, what happens when the payday lender asks you to give them the right to access your bank account. This is to save you from having to write a post-dated check. While it can be convenient to set up your payments this way, if you are unable to pay when the payday loan is due, the payday lender is able to repeatedly try to withdraw the money. This can result in multiple overdraft charges, which leads you to greater payday loan debt.
Payday Lenders Can Be Ruthless Debt Collectors (Abusive Calls, Harassment at Work or at Home)
If you are unable to repay your payday loan, some payday lenders can quickly become a nightmare and harass you at home and at work. Fortunately, however, you do have rights, as outlined under the Fair Debt Collection Practices Act (FDCPA), which says debt collectors can’t harass, oppress, or abuse you or anyone else they contact.
Payday lenders do not have the right to repeatedly call you with the intention of abusing or harassing you or whoever answers the phone. They cannot threaten you with violence or harm, nor can they use profane or obscene language. While payday lenders can report your information to a credit reporting company, they cannot publish a list of people who refuse to pay back their loans. They are also prohibited from making false threats to have you arrested or to make threats about doing things that are legally not possible.
It is always wise to keep a file of all correspondence between you and a debt collector. Remember to keep track of all dates and times of conversations as well as the names of people you spoke with and the topic. If you ever go to court or seek payday loan relief, having a paper trail could assist you.
The Takeaway for People Considering Payday Loans
It can be tempting to turn to a payday loan when you’re unable to make a car payment. The reality, however, is that by doing so, you are facing a high risk of that loan skyrocketing. There are some solutions, of course, including payday loan consolidation. The best course of action, though, is to stay away from payday loans entirely, which may be difficult to do in the short term but will save you a lot of money and headaches in the long run.