Payday loans are indeed the most despicable loans one can get and now online payday loan lending is one of the fastest growing areas of lending.
What Is A Payday Loan?
Payday loans are short-term un-secured loans to be paid back at the borrower’s next pay day. A fee is charged at either a flat-rate or a percentage of the loan. Most lenders don’t verify employment or income. The loan has traditionally been taken out at a store-front where the borrower writes a post-dated check for re-payment. Lately, payday lenders are increasingly going online. In an online payday loan, the cash is deposited, less the fee, directly into the borrower’s account with the expectation of re-payment on the next payday through automatic withdrawal from the borrower’s account.
A simple example: Borrow $100. Fee of $10. Lender gives borrower $90. Borrower owes $100 on the next payday. Effective interest rate 10%.
Roll-Over Is How They Get You.
The problems start when the borrower doesn’t have the money to re-pay the loan on time. This is exactly what the lender is hoping for. If the lender tries to cash the check, the borrower incurs bounced check fees from its bank and, worse, fees to extend the loan from the payday lender and higher interest rates.
Example continued: Borrower rolls-over the $100 loan. Additional fee $10. Total fees now become $20. Borrower now owes $110. Effective interest rate 20%.
Usually what happens is the borrower knows they don’t have the cash and they contact the lender to roll-over the loan for an additional fee. The same thing happens again and again until the borrower realizes there is just no way she can repay the loan.
Extended example: Borrower rolls-over the $100 loan a total of 5 times. Additional fees $50. Total fees now $60. Borrower now owes $150. Effective interest rate 66%
So Get Another Loan To Re-Pay The First Loan.
Once the borrower has extended the first loan a few times, she realizes she can never re-pay that first loan. The answer, she thinks, is to take a second loan to re-pay the first. At least that stops new fees on the first loan, right? Wrong! Now the process starts again on the second loan. Fast forward a couple of weeks and now this loan can’t be re-paid either.
New example: new loan to re-pay the first $166. Borrower receives $150. New fees $16. Effective interest rate on this new loan 10%.
Example after the roll-over: Borrower rolls-over the second loan 5 times and incurs additional fees of $80 for total fees of $96. Effective interest rate on this second loan is now 57%. But, remember all of this went to pay the first loan of $100, no new cash was received by the borrower. Therefore, the interest rate on that first loan of $100 is now 146%.
And Take Another Loan…
The good thing for the borrower is that payday lenders don’t check credit so they don’t know if a borrower is behind on other payday loans. At this point, the borrow can’t pay back the second payday loan so she just takes out another one and ignores paying the first. And so it goes until the guys who aren’t getting paid start actions to get their money.
Aggressive Collection Actions.
Payday loan lenders are some of the most unscrupulous collectors of their money on the planet. They will resort to anything including impersonating Police or FBI officers to threatening arrest and jail time. Eventually, a lender will sue the borrower to get a judgment then garnish the wages of the borrower for not only the originally amount but also for all of the fees owed and costs of collection including attorney fees. You can see how ugly this can get.
Just Say No To Payday Loans.
Payday loans are the most despicable loans you could ever become involved with. Although I know that people who resort to payday loans have trouble getting credit from traditional sources and are usually pressed for cash, there are other options.
Online Payday Lending Is Growing.
The volume of online payday lending—a term for smaller, short-term loans at high interest rates—grew to $18.6 billion in 2012, up 10% from the previous year, accounting for nearly 40% of industry-wide payday-loan volume, according to investment bank Stephens Inc.
Payday Lenders Know The Law.
Thirty-five states allow payday lending, while 15 others and the District of Columbia effectively ban such loans, mainly through interest-rate caps. But many Indian tribes have begun making loans over the Internet and argue they are sovereign states not subject to state-level regulation. Other lenders assert they don’t have to comply with state laws if they set up shop offshore or in states with favorable regulations such as Delaware and Utah.