Millions of Americans are stuck with payday loans. These are short-term loans with exorbitant fees and interest charges. They prey on those who are struggling and need a few dollars to make ends meet until their next payday. Our friends at NerdWallet have put together a nice video (below) and an excellent webpage which offers alternatives to payday loans.
The interest rates on payday loans can reach triple digits. The U.S. government, both state and federal, has been making an effort to curtail the legal limits which payday lenders can operate within. Unfortunately, these payday lenders are a clever bunch. The state of Ohio placed limits on these types of lenders. There would be an interest cap of 28% placed on short-term (payday) loans with a minimum term of 30 days; some payday loans are for a week or two. Ohio payday lenders sidestepped this new law; many of these lenders simply got licensed as mortgage lenders, and those lenders would operate under a different set of rules.
One of the options that NerdWallet suggests is Lending Circles. This website brings those in need together with those who want to loan cash. The loans are interest-free! So essentially, the lenders are doing something nice for those in need. These loans are relatively small; ranging from $500 to $2,000. But for those seeking a payday loan, this could be just the ticket!
The NerdWallet webpage has many other alternatives to payday loans. I strongly urge those who need a short term loan to consider the options presented on this page. They are all better options than payday loans.
Nine Signs of a Predatory Payday Loan
Payday loans are predatory loans. How do you know if the loan that you are considering is a predatory loan? The nice people at the Center for Responsible Lending put together a list of nine signs that the loan that you are considering is a predatory payday loan:
1. Triple digit interest rate
Payday loans carry very low risk of loss, but lenders typically charge fees equal to 400% APR and higher.
2. Short minimum loan term
75% of payday customers are unable to repay their loan within two weeks and are forced to get a loan “rollover” at additional cost. In contrast, small consumer loans have longer terms (in NC, for example, the minimum term is six months.)
3. Single balloon payment
Unlike most consumer debt, payday loans do not allow for partial installment payments to be made during the loan term. A borrower must pay the entire loan back at the end of two weeks.
4. Loan flipping (extensions, rollovers or back to back transactions)
Payday lenders earn most of their profits by making multiple loans to cash-strapped borrowers. 90% of the payday industry’s revenue growth comes from making more and larger loans to the same customers.
5. Simultaneous borrowing from multiple lenders
Trapped on the “debt treadmill”, many consumers get a loan from one payday lender to repay another. The result: no additional cash, just more renewal fees.
6. No consideration of borrower’s ability to repay
Payday lenders encourage consumers to borrow the maximum allowed, regardless of their credit history. If the borrower can’t repay the loan, the lender collects multiple renewal fees.
7. Deferred check mechanism
Consumers who cannot make good on a deferred (post-dated) check covering a payday loan may be assessed multiple late fees and NSF check charges or fear criminal prosecution for writing a “bad check.”
8. Mandatory arbitration clause
By eliminating a borrower’s right to sue for abusive lending practices, these clauses work to the benefit of payday lenders over consumers.
9. No restrictions on out-of-state banks violating local state laws
Federal banking laws were not enacted to enable payday lenders to circumvent state laws.
The Center for Responsible Lending is an excellent site with loads of worthwhile information, check it out: http://www.responsiblelending.org/