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Payday Loans: Blessing or Debt Trap?

People use payday loans for a variety of reasons. An unexpected medical or repair bill may catch a consumer off guard, especially if they don’t have any savings. A payday loan company is an option for someone who needs cash back and can pay back their loan when they get their next pay check. Payday loans are increasing in popularity, but they can be a dangerous financial tool if not used intelligently.

What Is A Payday Loan?

A payday loan is a short term cash loan with a very high interest rate. In order to get a payday loan, a consumer writes a personal check to the loan provider for the loan amount plus a fee. They may also give the company permission to access their bank account. The loan company deposits the check once the loan period is through. A consumer can reclaim their check by providing the payday loan service with cash. Borrowers can also pay a finance charge and have the loan amount rolled over into the next pay period.

States impose rules and regulations on the amount a payday loan service can lend. On average, loans range anywhere from $100 to $1000. The interest rates are very high, starting at 400% and steadily increasing. The average loan length is two weeks, and loans with shorter lengths have even higher annual percentage rates. Some states have imposed limits on how much interest a payday loan company can charge.

Payday loan companies also charge finance charges. For each $100, fees range from $15 to $30.

These companies take a big risk when lending, because they don’t check credit and have no collateral if the check bounces. Studies show that at least 25% of all loans they make default, and this is why they charge such high interest rates.

How Does One Get A Payday Loan?

In order to get a payday loan, borrowers must have some form of identification, a bank account, and a job. Credit checks are not necessary, nor must a buyer prove their ability to repay the loan.

Payday loan companies are also proliferating on the Internet. All someone needs to get a loan this way is a bank account capable of direct deposit transactions, a source of income, and to be over the age of 18. People can be approved instantly.

Payday loans are offered at pawn shops, rent-to-own companies, check cashing companies, and payday loan stores. There are more than 25,000 payday loan stores in the United States.

What Are The Risks?

Using a payday loan company is an easy way to go into debt. If a borrower’s check bounces, they are charged fees by their bank. Their credit score is adversely affected.

Online payday loan companies offer their own array of risks. Loans are wired into borrower’s accounts, and then payment is automatically transferred out. Internet payday loans may automatically renew every month. Before using an online payroll loan company, a borrower should be aware of the risks involved with giving out their personal banking information online.

If a consumer finds themselves strapped for cash for an unexpected expense or emergency, a payday loan is a viable option. They are especially helpful for people who have financial trouble and can’t get a traditional bank loan and for people who don’t have credit cards. Consumers must be aware of the risks involved, however, including high interest rates and fees. They should also be aware that the company they are using is not licensed or regulated by consumer laws. Failure to pay leads to fees and traps them in the payroll loan cycle. The cost of using a payroll loan is very high, and should only be used if the borrower can promptly repay the debt and has thoroughly weighed the positives against the negatives.

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