Getting to Know Payday Loans
A payday loan is a small unsecured loan that is short term, usually about 14 days. Payday loans date as far back as the early 1900s, but became very popular in the U.S. in the 1990s. Payday lending is legal in 29 states, including Michigan, with 9 other states allowing a form of it with more restrictions. As for the remaining 12 states and the District of Columbia, they do not allow the practice. The loan is designed to “act” as an advance on an individual’s pay check. The loans are usually to be repaid in a single payment, and could come with a fee if not paid. The amount of the loan is typically $500 or less, on average being $375. The loans are marketed as a saving grace when you are in a pinch — but can come with fees that weren’t expected.
Though payday loans are marketed as a simple, small, and short term loans, they have a few fees associated with them. There is typically a fee charged for borrowing, which is also called an origination fee. This amount is typically between $10 and $30 per $100 borrowed. A very common fee charged is $15 per $100. That means that for a loan of $400, the fee will be $60. The fee equals a more than 300% annual percentage rate (APR).
Keep in mind that the $460 will be due just two weeks after the loan is disbursed. If in two weeks the loan is unable to be paid off, then there is a rollover fee. For the rollover fee, it would the same amount of the origination fee because it is the same as taking the loan out again. This would give the borrower two more weeks to pay off the loan, which is now $520. Another fee that could be incurred due to not paying the loan in full within the first two weeks is late fees. If the payday loan is loaded onto a card then the issuer of that card could charge miscellaneous fees for use.
As you can see, there is quite a risk to obtaining a payday loan. The industry also has very lax lending standards. An example of this is that in most states, the borrower only has to have proof of income, a government issued identification, and bank or credit union account. Most other lenders of loans require a showing of creditworthiness through the checking of credit history. The Truth in Lending Act requires for payday lenders to disclose their fees. Although, due to the absolute need for the money, many borrowers overlook the costs. The payday lending industry typically targets those that need the loans the most and won’t care as much about the fees and lending standards. Predatory lending is any lending that imposes unfair terms, practices coercive, deceptive, and exploitative tactics. Through this definition, payday loans can be characterized as predatory lending.
Payday lending was invented as to serve a need that was missing in the lending industry. Though for some it is just a one-time loan to get out of an unexpected financial situation. For many it has become a seemingly never ending cycle of fees with more and more debt. There are alternatives to payday loans, so make sure to always do your research before obtaining a loan. Visit your financial institution to see what options they offer and what would work best for your lifestyle.