Payday loans have come a very long way, but unfortunately, they are notorious for charging very high-interest rates. Yet, a lot of people are hinging on these loans to fund their emergencies. As the name suggests, these loans last until your next payday, which means the term of these loans is usually up to 14 days. The duration of these loans is very small, so they aim at unexpected funding expenses.
Although payday loans are more expensive than any other small loans, people use them for funding as they can qualify for them without a credit check. Even bad credit borrowers are also eligible to apply for these loans. In fact, some people take out payday loans for the unemployed when they need money on an urgent basis.
Another reason for using these loans is that people can get rid of debt once and for all. Unlike term loans, they do not have to be tied with tedious repayments. However, sometimes the reality is just the opposite of what you have assumed. This blog discusses some claims and the facts to debunk them.
Claim 1: payday loans are approved based on the affordability of borrowers
Fact: getting a payday loan will rather cause you more financial problems.
Payday loans come with no credit check; hence, bad credit borrowers also do not face difficulty getting the nod. It makes it easier for borrowers to get money without a credit check, especially when they need it immediately. Still, they do not realise that your lender has no idea of past payment records, affordability, or why you are borrowing money.
The fact is that payday lenders expect that you check your affordability before submitting the application form. Studies have discovered that payday lenders generally lend money with the hope that you would roll over it after every 14 days.
Claim 2: customers understand the cost of payday loans.
Fact: payday lenders misrepresent the cost of payday loans.
Most of the borrowers live under the impression that payday loans cost do not cost more than 292%, but in reality, the interest rate could be up to 521%. This is because of late payment, default, early repayment, and monthly and processing fees.
It means if your loan is outstanding for a full year, you would have to pay down more than five times the borrowing amount. However, some payday lenders do not charge more than the capped interest rate, but there are few.
Since payday loans are taken out to meet emergencies, people do not have sufficient time to do research. They need a quick injection of cash and therefore make a quick decision based on the advertisement claims they come across.
Claim 3: payday loans aim at targeting both low and middle-income households.
Fact: industry trend suggests that payday lenders target disproportionately low -income households.
Payday loans have been advertised as they aim at every household that needs money to fund emergencies, but the reality is opposite to the claim they make. They target only those borrowers who are living paycheque to paycheque. Middle-income households manage to set aside some money to finance urgent needs, but people who are on low wages or living paycheque to paycheque find it harder to stash away money for a rainy day.
When an emergency crops up, they immediately rush to payday lenders. You often fail to realise that you could not afford to pay out of your pocket, and now you are to pay back to the lender not just what you borrowed but the interest as well on your next payday. As a result, you keep rolling over the loan and eventually end up falling into a payday trap.
Claim 4: payday loans do not charge fees.
Fact: payday loans charge fees, not just early repayment fees and late payment fees but processing fees as well.
Most payday lenders have advertised these products as they do not charge any fees; hence, they are cheaper than other small loans, including bad credit loans. Like other loans, they also follow a fee structure; surprisingly, it is higher than other loans.
Payday loans also charge processing fees, early repayment, default, and monthly fees if you keep rolling over the loan. In fact, some payday lenders charge interest on the total amount (principal+ late payment fees), which quickly adds up the cost.
Claim 5: fees are high because they are too risky.
Fact: payday lenders earn a lot of profits, so there is no requirement of charging higher fees.
It is not easy for borrowers to escape the payday debt trap if they are unable to pay it. When the threat of criminal prosecution chases them, and the loan is rolled over every two weeks, it gives lenders an opportunity to make huge profits.
They can earn a lot of money by charging interest rates of at least 292%. Charging high fees and interest penalties every time a default is made is just a way to keep borrowers tied with a trap.
Are all payday lenders bad?
As you know, each lender has a different policy, and you cannot say that all payday lenders are bad. Some lenders carefully examine your affordability before approving the loan, and they run a soft credit check to know about your repaying capacity.
Although payday loans have a repayment span of two weeks, some lenders lend money for between one and six months, depending on the borrowing amount. They accept weekly payments if the repayment term is a month and monthly when the term is more than a month.
Now you know the reality of payday loans, but you can still find the one suitable for your financial condition. You should do the proper research beforehand, so you choose a reliable lender. Ask them if you have queries and doubts before you apply, and do not forget to check your affordability.