Why Small Borrowers Should be Wary Despite Regulations on Payday Loans

Payday loans are typically touted as a source of emergency funds for people who need instant access to cash. Borrowers can walk into a store offering such quick cash advances and write a postdated check for the loan amount plus applicable interest. The lender hands over the cash in return for an agreement that the check will be deposited for collection into the borrower’s bank account only after two weeks or four weeks. Although the credit process seems simple, it has many pitfalls and can drag you into a high debt trap within a short time. In an attempt to protect small borrowers, the law has instituted several regulations on payday loans. You’ll also find various financing organizations that offer you safer and cheaper alternatives along with options for relief from payday loans.

Payday Loans Have High APR

As all authoritative agencies and government websites warn you, when borrowing payday loans, you may want to think it over carefully. That’s because, cash advance loans, as payday loans are also called, carry a high APR of 662% as reported by the Center for Responsible Lending. You might think that getting a credit card or other loan options when you need cash in a hurry can cost you more. However, to give you an example, as compared to payday loans, you’ll pay just 17.55% APR on credit card payments. How that happens? Payday loans carry interest rates that range from 15% to 20% depending on individual lenders. In some states, this interest can be even higher.

The law has strict caps on the maximum percentage a credit provider can charge. Further, the law permits you to take loans of up to $500 with the lowest possible being $50. These regulations on payday loans are designed to protect the small borrower from racking up a huge debt within a short time.

Most Americans Take Cash Advance Loans for Essential Expenses

According to statistics released by Finder, each year, around 12 million Americans take payday loans. The alarming fact is that close to 70% of these borrowers get loans to cover essential expenses that recur every month. The loans are typically used to pay off rent, food, utilities, gas, and credit card bills. But any person who needs a loan to cover the bare necessities will likely not have enough money to cover their expenses in the next month – leave alone pay back the loan and interest amount. Say, for instance, you borrow an amount of $500 that works out to $575 when interest is added. At the end of the loan term, if you cannot repay, the lender might offer you the option of rolling over the loan. But, for an additional fee. The new loan amount could now be $625 or higher depending on the agreement you have with the lender.

In an attempt to prevent the loan amount from growing quickly, regulations on payday loans require lenders to confirm that borrowers have adequate income. Loan makers must ensure that the borrower can pay back the loan amount and have enough cash to manage regular expenses. Further, if you’ve already taken short-term loans three times, consecutively, the law does not permit additional loans for a 30-day period.

Your State Might Have a 36% Limit on Payday Loans

Many states have regulations on payday loans that permit a maximum of 36% interest rate. Thanks to this law, lenders cannot levy an APR of more than $1.36 for every $100 you borrow. As this article on Governing explains, these rules have led to many loan makers closing down their lending business. If you haven’t been able to find a brick-and-mortar store offering cash loans, you might be tempted to check with online lenders. Such loan providers are typically unscrupulous and borrowers may find themselves at the receiving end of their unfair practices. You also risk your loan getting transferred to a collection agency. It is preferable to look for alternatives that have lower interest rates and repayment terms that are easy to manage.

You Can Choose from Various Credit Alternatives

Although the government has regulations on payday loans to safeguard the interests of small borrowers, in place of taking short-term loans, you could consider alternatives. Consider picking up a second job or extra hours at work. Contacting friends and family for help or pawning off items that you don’t really need are also wiser choices. Should you check out this feature on MarketWatch, you’ll learn about safer sources of emergency funds. Here are a few of them:

Non-Profit Lending Groups

Joining a non-profit lending group by signing up online can help you create a source of funds when you need them urgently. At the time of signing up, you’ll pay a small amount into the pool and take part in a credit education course. The members of these groups lend money to each other at 0% rates of interest.

Credit Union Loans

Several credit unions across the country offer small loans to people who need them. You can get sums ranging from $200 to $1,000 and repay in a period from one month to six months. The maximum APR on these loans is 28% with a small application fee of $20. Some agencies may charge you 0% interest.

Personal Loans

If you have a good credit score, taking personal loans is a good option. You can take loans of $500 for a period of 12 months for an interest rate of 14.99%. In addition to making payments of $45 each month, you’ll pay a total interest of $42, which is a practical solution.

Credit Cards

Borrowers who are confident they can make the minimum payments each month for their credit cards can consider opting for this alternative to payday loans. While you may need a good credit score, choosing a card with a no-interest introductory program for 12 months is a perfect source of funds.

The law has laid down several regulations on payday loans to protect consumers from the malpractices of lenders. Before taking such loans, you may want to explore all options and understand your rights and make the best choice. Your future could depend on it.

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