A cash loan lender is a financial institution, an individual, a public group, or a private group that makes loans available to someone with the expectation that the will be paid back, in addition to any interest or fees, either in increments (as in a monthly mortgage payment) or as a lump sum. Lenders may provide funds for a variety of reasons, such as a mortgage, automobile loan or small business loan. The terms of the loan specify how the loan is to be satisfied, over what period of time and the consequences of default. When applying for a loan, a bank assesses credit risk based on the borrower’s credit/payment history, income and overall financial status.
If a sudden bill occurs, a cash advance can seem like a perfect solution. Payday loans can cost greatly and should be approached with caution. High interest rates aren’t the only drawback of payday loans. Before you get tempted, you should understand the pitfalls of the payday loan arrangement. If you’re not careful, your quick and easy “solution” will only create bigger financial problems down the road.
Know What You’re Getting for the Loan- Tthe term “payday loan” has acquired a negative connotation and financial institutions employ a broad array of signifiers to describe the same arrangement. Called a payday, salary, short-term, cash advance, small dollar or payroll loan, any short-term loan offered through an independent lender should prompt careful analysis.
The traditional “payday loan” requires a post-dated check as guarantee for payment within a short timeframe. The payday lender proactively charges a percentage on top of the loan, which typically becomes due in two weeks. Once the loan expires, the borrower either pays the original amount plus interest in cash, allows the lender to deposit the original check, or pushes the payment back for an additional fee.
Interest Rate Acrobatics – The main problem with these arrangements comes from how interest gets calculated. Most payday lenders charge a set percentage of the loan’s total amount. The interest may not seem like much, but it becomes troublesome due to the loan’s brevity.
“The biggest drawback to a payday loan is the interest rate,” says David Bakke of . “It might not look that bad as it is presented to you, but when the interest is calculated, it’s a far cry from what you would pay with a credit card.”
Traditional loan and credit card interest gets calculated according to annual percentage rates. An average credit card has an APR of 12-14%, which means that over the course of a year the interest charges amount to 12-14 percent of your total debt. With a payday loan, the interest accrues much faster. Calculated as an APR, the average interest on a payday loan is around 400 percent.
Predatory Lenders – A second pitfall of payday loans comes from the operating practices of the lenders. Unlike a traditional bank, which seeks to gain the loyalty of long-term customers, most payday lenders care little for personal circumstances. If you miss a payment, do not expect sympathy.
“Outrageous fees, interest and a lack of desire to work with the debtor make these loans terrible,” says Scott Vance, a financial advisor and 22-year Army veteran. “When I was in the Army, these predatory lenders were one of the biggest headaches I dealt with when working with younger soldiers.”
Additionally, payday lenders know that many of their customers have no access to credit or savings. This means that when the late fees begin to pile up, the borrowers have no recourse but another loan.
Cycle of Debt – This arrangement – exorbitant interest and borrowers with no access to traditional financing – encourages a disastrous cycle of indebtedness.
“Payday loans are typically predatory, being offered to those who represent poor credit risks,” says Rob Drury, executive director of the Association of Christian Financial Advisors. “Perhaps the worst part is that the desperate situations in which they are sought and high interest rates often result in the need for subsequent loans.”
Payday loans must get repaid quickly; but if desperation has driven a borrower to a predatory lender, he or she can struggle with the quick turnaround. This results in an escalation of debt, which only becomes payable through additional loans. A solution to a financial emergency can thus create its own debt, one that quickly outweighs the original need.
Easy and Quick Approval – As mentioned earlier, the approval process is quick and easy. When you submit an application to the bank, a long time may pass and you may still not be sure whether your loan will be approved or not. Due to this, regular loans are not suitable for emergency financial situations or urgent cash needs. When you need some cash urgently, you should apply for payday loans. Lenders approve your loan within a couple of hours. Sometimes, your loan may even be approved within minutes. Therefore, payday loans are perfect for people who are looking for quick cash.
Simple and Convenient Process – Unlike financial institutions, you don’t have to submit a lot of documents with payday companies. Moreover, your application will not go through multiple layers of approval before you finally get a cash or wage advance. For a payday loan, you just need to submit an income and identification proof.
Most payday organizations have a one-point application approval process. These companies quickly review your application before approving it. Within a short period of time, money is transferred to your account.
Exceptional Annual Percentage Rates (APR) – Contrary to popular belief, payday organizations don’t extract high annual percentage rates from customers. Due to increasing competition, APR is usually quite low. However, APR may depend on the time period for which you have borrowed the money. APR will increase if you choose to extend the borrowing period.
Your Data is Kept Confidential – Almost every payday organization maintains a strong data security system. Payday organizations keep your personal and confidential details secure. No one will ever know about your application. Your information is not compromised in any manner. In fact, all lenders use data encryption systems. This prevents any unauthorized access to your personal details.
Online payday loans should never be treated as long-term solution. It is important to understand that interest rates of payday loans and long-term loans differ in many ways. Therefore, it is always better to pay a payday payday loans Michigan loan on time.