How payday loan words?
Payday loans are short-term loans. They are usually for a period of 14-35 days. They are very expensive loans when compared to others. Let me show you the difference if borrow $300 from a credit card repayable in a month you will be charged a mere $13.99 at a rate of 57% per annum. If you take the same amount of payday loan @ $17.50 per $100 you will charged about $105 at a rate of 426% per annum. This amount is paid when do not falter and will increase substantially if you falter. That is the difference between quick and instant cash. Borrowers who borrow to get rid of their debts ironically get stuck in a vicious cycle which they could not get out of and decrease the savings of such people.
How do the payday loan systems function?
Usually it is obtained for two weekly basis. The borrower gives the lender a post dated check which includes the borrowed amount and the interest. It is withdrawn on the payday. Or the borrowers sign over electronic access to their bank account. They amount that can be lended is restricted to $100-$1500. There is no need for faxing information to get a Faxless payday loan. At the time of the payday the amount is withdrawn along with the interest. The rate of interest ranges from 390 % to 780 %. When the consumer fails to pay on time he charged an even higher rate. This has severely affected the chance of getting out a debt.
Reforms to protect the interests of the consumers
One need to understand that the people who take payday loans are not rich they are consumers who are in the middle class. They can’t afford such high rates of interest at the same time can’t afford not to have financial aid. This is tricky situation. The Government has noticed this and has made certain reforms to protect the consumer from the iron grip of the lenders.
First the government persuaded the states to put caps on interest rates. But this move did not pan out well as several states feared lender migrating out of the state. So the government decided to have three categories. All the states should fall out in at least on category.
- First category made clear that the lender should comply with the states small loans laws. According to this the interest cap was as low as 36% which dented the hopes of payday loan lender to make high profit and ensure fairness to the consumers
- Second category let the lenders to set whatever rate of interest, as long as the borrower agrees to it. But still the state has comply with the small loan laws
- The third category involved setting a maximum amount that can be borrowed which $300 at a rate of 15 %. Setting up of maximum made sure that government can regulate the amount a consumer can borrow
In all the three categories the government has made sure that the government has made sure the consumers are not exploited by the unscrupulous payday loan lenders. The consumer debts are monitored by the government and at the same time they get more if they want.
Conclusion:
One has to understand that payday loan should be a last resort and not the first choice. It may be disastrous if don’t handle it well.
