Monday, June 18, 2012

Payday Loans -- Loans of Last Resort

Payday loans are loans of last resort and should not be used with any regularity. Their interest rates are exorbitantly high (borderlining on usury), and once a person begins getting payday loans, it can become almost addicting. Many people who start out getting payday loans do so with good intentions, only to end up hopelessly trapped in an endless cycle of never-ending debt and loan fees.
How It Works:

A payday loan can be taken out online or in person.
In Person:
If a person gets an in-person payday loan, he or she fills out an application and provides two recent pay stubs. After the loan is approved, the borrower writes a check for the loan amount, plus a borrowing fee, to the lender. The lender holds onto the check until the borrowers next payday and then deposits it. 
Sometimes the borrower does not have enough money in the bank for the check to clear. So he pays the loan fee and extends the loan for two more weeks. This is how the endless debt cycle begins.
To get an online payday loan, a borrower doesn't even have to leave home. He or she fills out the application of a payday loan broker and returns it. The loan broker reviews the loan application and submits it to the lender who best fits the borrower's needs. Once the lender approves the application, the borrower gives the lender the pertinent bank information. The lender deposits the money electronically into the borrower's checking account.
When the loan becomes due and payable, the lender then withdraws the loan proceeds, plus the loan fees, from the borrower's account. If the borrower wishes to extend the loan for another two weeks, he or she notifies the lender and pays the loan fees only. The loan is then is rolled over for two more weeks when the loan proceeds, plus new loan fees, will be automatically withdrawn from the borrower's checking account. 

Interest Rates:
Most loan fees on payday loans are between $15 and $20 for every $100 borrowed. If a borrower's loan fee is $17.50 per $100, the interest rate (are you sitting down?) on that payday loan would be 456 percent. This is the main reason that payday loans should be used only in an emergency.
How to Qualify:
Payday loans are easy to qualify for. A potential borrower must be a U.S. citizen and be over the age of 18. A borrower must make at least $1,000 gross income monthly and have been on the job for at least six months. (Some payday lenders will waive the six-month work requirement.) People who are living on a fixed income such as Social Security Benefits or Workers' Compensation Temporary Disability Benefits can also get a payday loan as long as they make at least $800 a month and meet the other payday loan requirements. Last, the borrower must have an active checking account. 

States Vary:
Many states have been cracking down on payday lenders because of their high interest rates. Below is a state-by-state summary of payday loan laws, borrowing amounts, fees and finance charges:
Loans of Last Resort:
For people who are going through hard times, like a foreclosure or a bankruptcy, payday loans are a godsend because no credit check is ever run. If a person with bad credit needs new brakes or a new hot water heater, a payday loan can serve a good, one-time function.