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10 Reasons To Avoid A Payday Loan

05 August 2020 | 1 comments | Posted by Luke Fitzpatrick in Money Talks

Reasons to not take a pay day loan

As currency printing continues to drive up asset prices and the wealth divide we're seeing currency debasement hit the lower-income section harder than it ever has before in recent memory. Price inflation on goods and services continues to grow each year while wages are flat which results in a lower standard of living and consumers income not reaching as far as it could have done in the past. 

According to research by Ratesetter, 37.4% of baby boomers, 37.1% of millennials, and 39.6% of Gen-Xers said they are planning to borrow money to consolidate debt. Credit card debt represented the number one reason at 52%, followed by personal loans at 29%, and car loans at 18%.

For some, payday loans seem like a quick fix. These short-term loans offer borrowers up to $2,000 to be paid back in terms of 16 days to one year. While this may seem a viable alternative, there is a sheer downside to borrowing this type of money.

1. The fine print

Payday loans are rarely an optimal solution but could be worthwhile if the borrower is absolutely confident the loan can be paid in full on the next payday.

If the borrower is unable to meet this obligation due to unforeseen circumstances, stiff penalties will be added as detailed in the fine print of the application. Laden with legal jargon many attorneys would find daunting, people with no legal background—or legal advice—sign these and often without sufficient consideration.

2. Finance charges

The barrier for payday loan qualification is low. The borrower must have a bank account, a reliable income source, and suitable identification.

With this type of loan, the borrower gives the lender a post-dated check for the amount borrowed plus the finance charge. The lender gives the borrower cash, deposits the loan amount directly into the borrower’s bank account, or provides a prepaid credit card.

Finance charges can range from $10 to $30 for every $100 borrowed. The amount the lender is permitted to charge is restricted by the state but a fee of $15 per $100 is common. Calculated annually, this is a percentage rate of almost 400% for a two-week loan.

3. Racking up the fees

If on the following payday, the borrower does not have enough money in the bank to cover the post-dated check, the lender may allow the borrower to roll over the loan. If this happens, the loan repayment amount is increased with additional fees, such as late fees.

The borrower can roll the loan over as many times as the lender allows, but each time additional charges are added. The amount to be repaid grows substantially.

4. A loan to pay off the loan

The cycle of escalating fees creates a dependency on the lender. With one loan already in place, the borrower may need a second loan to make the payments on the first. It’s an ongoing, escalating cycle of debt that can grow to three, four, and even ten times the amount originally borrowed.

5. Too quick and easy

With traditional personal loans, loan approval takes time—anywhere from a few days to a few weeks. The downside to payday loans is the ability to become contractually obligated in unsavoury business practice with less effort than it takes to choose a new hairstyle.

Without investing time into carefully reading the fine print and vetting options that might be less appealing (such as borrowing from a family member) or not as fast (borrowing from a bank or lender), desperate people are inclined to make hasty decisions.

6. Automatic withdrawals

One of the reasons payday loan lenders require a bank account is to gain access to the borrower’s money. On the payment due date, the lender makes an automatic withdrawal. In the unfortunate event, there are insufficient funds, the lender might divide the amount into smaller transactions and attempt several withdrawals.

If there is not enough money to cover these transactions, the bank assesses fees on the account holder. Now, not only does the borrower have a loan to pay, but there are also hundreds of dollars in fees incurred with the bank.

7. The ugly side of collections

For borrowers unable to repay loans, these lenders have been known to use aggressive and frightening collection tactics. It’s not unusual for them to make hundreds of collection calls, send letters, issue verbal threats, and make demands for court appearances.

8. Harassment

A loan. A second loan to pay the first loan. Fees. Bank charges. Penalties. The debt grows and it can be overwhelming and is exacerbated when lenders ring as many as several times a day looking to collect on the loan.

Australia’s Fair Debt Collection Practices Act prevents collectors from phoning late at night and harassing the borrower or the borrower’s neighbours in person, but—despite possible criminal charges—they have been known to be aggressive in their pursuits.

9. Getting sued

If all else fails and the lender is unable to get the borrower to pay the loan, they may turn it over to a collection agency. The collector will likely file a suit, which they typically win because many borrowers don’t show up for court. The judge then has no choice but to rule in the collector’s favour.

The best thing a borrower can do is show up. Demand proof of the debt because often, these types of lenders are not able to show proof. If the debt collector does show proof, ask the court for payment arrangements.

10. Creating a negative feedback loop

By taking out a payday loan all you do is cover yourself for a short time span but you never get yourself out of the hole. You're only providing temporary respite before the bills pile up again and your debts come back to bite you. Payday loans are not a solution for debt, but rather debt restructuring and financial education which will help you get back into the black and resist the urge to use debt-based products to fund your purchases. 

Final remarks

Being in debt is stressful, but owing money to a harassing lender is far worse.

At this extraordinarily unusual and difficult time, people tend to be more compassionate and ready to help. So, before considering putting yourself and your family through unnecessary strife, reach out to family and friends to see if they can help, speak with creditors to work out payment arrangements, apply for a no-interest or low-interest personal loan, or see if a peer-to-peer loan is available.

Lastly, but perhaps most importantly, talk with a financial counsellor to learn about getting back on the road to financial security.

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Recommended reading

If you enjoyed this post and have a little extra time to dive deeper down the rabbit hole, why not check out the following posts on loans.

Tags: Pay Day Loan, Personal Finance, Guest Post

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