The payday loan is a small
and short-term loan that generally intends to cover expenses until the next
payday so you get the money you need to get you out of the financial hole but
only momentarily; in fact, the payday loan is sometimes referred to as cash
advance and is different from the concept of loan consolidation, and
far from it.
Payday loans are now a much debated
argument and a lot has been written about them, even very recently. The latest
attempt to curb payday lending in some US states hit an early obstacle when
some state legislative committees voted t to reject proposals that would
prohibit lenders from charging fees that would boost borrowers' cost. No wonder
there: this industry is growing very rapidly indicating that the business model
is highly profitable and, in addition, finance companies involved in this
business have contributed several million dollars over the years to various
state legislators... So I guess we have to do with payday loans: nevertheless,
the real question that everybody should be asking, especially those who, even
if they wish otherwise, could not do without such a loan type, is this:
Are there alternatives to
(expensive) payday loans?
Unfortunately, it is often the only
loan available to consumers with bad credit or who cannot find a bank willing
to loan to them (or that cannot find a credit card, or other lower-interest
rate alternative). On the other hand, it should be noted that most borrowers
may find themselves in a position that is worse off when the loan is due than
they were when they took it on; many borrowers may incur in a vicious cycle and
can get trapped in a cycle of debt.
So what is the solution to this
conundrum?
For one thing it is important to
know the facts and figures so to be able to judge independently what is being
advertised, how is being packaged and why (or not) is being offered in a
certain way. A typical payday loan can be between $100 and $1500, on a two-week
period and have very high interest rates, usually in the range of 380% to 900%
yearly (although most of the US states have usury laws that forbid interest
rates in excess of a certain Annual Percentage Rate or APR).
Nevertheless, this has not stopped
payday lenders who have in fact succeeded in getting around usury laws in some
states by forming relationships with banks registered in a different state with
no usury ceiling (and this is the case of states such as South Dakota or
Delaware). In Canada the situation of payday loan may be different: according
to Canadian law, any rate of interest above 60% per year is considered
criminal. This in turns limits can limit the practice of payday loan in Canada.
And remember to be careful also if you are considering other completely
different loans such as student loans... but this is another story, and another
article!
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