The alternative to payday loans has its own risks



Payday loans target consumers with no credit or low credit. According to industry research firm IBISWorld, the U.S. check cashing and payday lending industry is set to grow 5.1% in 2022.

These high-interest loans promise quick cash until the next paycheck arrives, but they often create dangerous cycles of new loans to pay off old ones, draining finances and pushing borrowers ever deeper into debt. poverty.

Some states impose rate caps or rate restrictions on these types of loans. However, the qualifying interest rate can be exorbitant; For example, the California rate restriction for a 14 day loan of $100 can be as high as 460% April.

Today, consumers enjoy some protection against this type of predatory lending through the Rule on pay day, the title of the vehicle and some loans to high-cost temperament of the Office of Financial Consumer Affairs. But another form of loans, known as installment loans, are slowly emerging as a less regulated alternative to payday loans.

Payday Loans vs. Installment Loans

Payday loans and installment loans are similar in that they are a short term solution when you need money right away. The main differences between payday loans and installment loans are whether they are secured (meaning if collateral is needed to secure the loan), how much you can borrow, and how long you are given to repay. the loan, plus interest and fees.

Payday loans are generally a smaller amount as a few hundred dollars, while installment loans can reach amounts up to $ 10,000. Payday loans are also reimbursed at a fixed price with next pay period of the borrower. Conversely, the payments are paid in installments over several months or years.

Although payday loans and ultrasound loans offer a quick source of funding in a pinch, they often lead to further financial turmoil for struggling borrowers due to steep interest rates and high fees. .

Payday and short-term loans

Payday and short-term loans are generally unsecured and do not require collateral. They are typically offered for $500 or less at interest rates of 400% APR or higher, depending on your state’s regulations.

These loans have to be repaid by the borrower’s next pay period in full. Some states allow lenders to renew the loan if borrowers need more time.

Other types of short-term loans include:

  • Car title loans. Car title loans use your car title or “Pink Slip” as collateral for a short-term loan. Generally, you have 30 days to repay the loan in full; Otherwise, the lender will take possession of your vehicle.
  • Pawnbrokers. These loans require the use of a valuable asset as collateral in exchange for a small portion of its resale value. If you are unable to repay the loan, the pawnbroker keeps your property.

Problems with short-term loans

If payday loans provide money to almost 12 million Americans in need and make credit available to an estimate 11 percent Americans with no credit history, how bad can they be? The answer is complicated.

Payday loans allow lenders direct access to checking accounts. When payments are due, the lender automatically withdraws the payment from the borrower’s account. However, if an account balance should be too low to cover the withdrawal, consumers will face overdraft fees from their bank and additional fees from the payday lender.

Getting a payday loan is easy – that’s why a lot of them fall into predatory lending territory. Borrowers only need to submit ID, employment verification, and account verification information. Payday lenders don’t review credit scores, which means they’re too often given to people who can’t afford to pay them back.

People who are constantly strapped for cash can fall into a cycle of payday loans. For example, a woman in Texas paid $1,700 on a $490 loan from Ace Cash Express; It was his third loan out this year, as reported by the Star-Telegram.

When the initial loans are rolled over into new larger loans on the same fee schedule, borrowers have problems due to interest and high fees.

Installment loans

Destination loans are part of a non-bank consumer credit market, meaning they come from a consumer finance company instead of a bank. These loans are typically offered to consumers with low incomes and credit scores who may not qualify for credit through traditional banks.

Ultrasound loans range from $100 to $10,000. Loans are repaid monthly within four to 60 months. These loans can be secured or unsecured.

These are similar to payday loans in that they are intended to be a short-term use and target individuals with low income or low-income credit scores. However, both types of loans differ greatly in their lending practices.

Pew Charitable Trusts, an independent non-profit organization, to analyse 296 installment loan contracts with 14 of the largest lenders versions. Pew found that these loans can be a cheaper and safer alternative to payday loans:

  • Monthly payments on installment loans are more affordable and manageable. According to Pew, the loan payments on installment is 5% or less of a borrower’s monthly income. This is a positive point, given that payday loans often absorb a large share of paychecks.
  • It is cheaper to borrow with an installment loan than with a payday loan. The Consumer Financial Services Protection Bureau found that the median charge on a typical 14-day loan was $15 per $100 borrowed. Borrowing toward the down payment, however, is much cheaper, according to pew.
  • These loans can be mutually beneficial for the borrower and the lender. According to the Pew report, borrowers can repay their debt in a “manageable period and at a reasonable cost,” without compromising the lender’s profit.

Risk installment loans

At first glance, installment loans are more profitable and appear to be a safer route for consumers. However, they come with their own risks:

  • State laws allow two harmful practices on the loan market in temperament selling useless products and billing costs. Often installment loans are sold with complementary products, such as credit insurance. Credit insurance protects the lender if the borrower is unable to make payments. However, Pew says that credit insurance provides a “minimum benefit to the consumer” and can increase the total cost of a loan over a third.
  • The “all-in” APR is usually higher than the APR stated in the loan agreement. The “All-in” APR is the actual percentage rate a consumer pays after all interest and fees are calculated. Pew lists the average whole Aprils for loans under $1,500 to be up to 90%. According to Pew, the non-all-in-one APR is the only one required by the Truth in Lending Act to be listed, confusing consumers who end up paying much more than they thought at the time. origin.
  • Installment loans are also commonly refinanced, at which point consumers again have to pay a non-refundable origination or acquisition fee. Additionally, a non-refundable origination fee is paid each time a consumer refinances a loan. As a result, consumers pay more to borrow.

Other alternatives to short-term loans

If you need money, there are other alternatives to consider payday loans and debt payment. Here are some options:

  • Credit-generating loans. These loans are for borrowers whose credit is weak or nonexistent. The financial institution will provide credit funds in a locked savings account you’ll have access after making all the installments on the loan.
  • Alternative payday loans. Alternative payday loans, or PALs, are provided by credit unions to their members. These loans are for a small amount of less than $1,000 which are repaid over a month or a few months, depending on the institution.
  • Aask your employer for an advance. Some employers offer payday advances to their employees. Remember that if you move a part of your next paycheck, then your next pay period will be at a reduced amount.
  • Negotiate a payment plan with creditors. Contact your creditors, whether for hospital bills or a credit card bill, to explain your financial situation. They might be able to share payment plan options that you weren’t aware of.

Short-term loans may seem like simple solutions, but be sure to research the best option for your situation.