This is a guest post from regular reader Melissa…
It may seem at times payday loans are sold as a cure-all for everyone. However, these loans are far from a cure-all and are a consumer-lending product that is targeted for a market that has very few other alternatives. The market is for people with little or no credit history, no other sources of lending, and few assets. Most bankers will have a tough time approving lending for people in this category and so payday loans offer people who have this background a chance to obtain short-term loans that are paid back on their next paycheck cycle.
The interest rates on these loans are typically higher than other sources of lending, like credit cards or installment loans. However, they are also higher risk loans for the lender since no credit check is performed. This allows people who have suffered a foreclosure or a bankruptcy to still have options to borrow, even though the rates are higher. If they show a willingness to repay these loans on time, it can be an excellent way to rebuild their credit histories while providing needed funds in the short-term. Without this industry, people who don’t qualify for conventional sources of credit would not have any other way to meet short-term losses in income.
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Far from doing people with bad credit a charitable service, payday loan places are business that often seek to maximize profits on the back of people that have no where else to go. The arguments for payday loan places are similar to the arguments made for loan sharks.
Payday loans places charge up to 400% annual interest on a loan. While they don’t run a credit check, they do require that the person have a job and require a post dated check. So statements that they loan to anyone aren’t accurate.
More telling is that Payday loans places don’t allow you to pay down principal over time. The loan is for two weeks, if after two weeks, you can’t pay only part of it back and lower your interest cost. You have to roll over the whole thing and get charged interest on the whole thing.
If they actually cared about the borrowers, they would change that.
That’s just the legal stuff.On top of that, there are abuses by payday loans places. Plenty of accounts in which they violated collection law or tried to cash a check several times in one day running up huge bounced check fees for the borrowers.
Do anything and everything you can, including simply not paying non essential bills for a month or two before going to a payday loan places. It just makes more financial sense.
There is no question that there are payday lenders out there that abuse the people they lend to and also the system in general. There is a need for payday loans however, as the article said, for people who have no other access to credit.
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