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Understand What You’re Getting Into Before Taking Out A Payday Loan
Borrowers who turn to direct payday loans to meet monthly financial obligations may find themselves turning to the same source to pay off their loan. A vicious borrowing cycle can be perpetrated by taking out a loan to pay bills and then finding it’s difficult to pay the loan back. Taking out a second or third loan to make payment on what was initially borrowed could be the beginning of a financially crippling situation.
The Pew Charitable Trusts’ Small-Dollar Loans Project conducted a study about how consumers borrow and pay back payday loans from a direct lender. A typical borrower will turn to a short term lender online or one that can be found in a storefront location, to borrow on average $375 with a $55 loan fee attached to the principal loan balance. The consumer must give the lender their bank account information in order for the funds to be directly deposited into the borrower’s bank account. Generally, funds are deposited the next business day. The lender will then expect the borrower to repay the loan with their next paycheck. Ironically, the average loan takes about five months to repay.
Turn to a Direct Payday Lender When You Understand the Risks
The study discovered several interesting things about the use of payday loans, who utilizes them and why they are so readily popular with such a large portion of American consumers. The report found that 58% of borrowers take out payday loans because they are having problems meeting their monthly financial obligations. Lack of day to day cash is often the cause of borrowing and that this is the reason borrowers take out multiple loans and/or take longer to pay them back. Payday loans are meant to be short-term but for many consumers, making repayment becomes a long-term issue. This becomes a surprising and frustrating situation for those who get themselves locked into a payday loan obligation.
The study also found that many payday loan borrowers turn to the options they had before they borrowed, in an effort to pay off their loan: borrowing from family or friends, selling personal possessions or taking out a non-payday loan. Although consumers reported that they like the fact that they can get cash fast, and with friendly service, frustration comes from enduring high loan costs and the lengthy amount of time it can take to pay the loan off. While many consumers said they felt a sense of financial relief from getting cash, many also felt they had been taken advantage by an online loan company. When a borrower experiences a situation where they need emergency money, it may be prudent to start from the bottom and work their way up. Can they find a lender with low interest rates like a federally chartered bank or credit union? If that’s not an option can they turn to a list of direct payday lenders that are at least licensed to do business in their state?
The foundation found six primary reasons for the use of direct payday loans
Desperation- Over one-third of those surveyed said they were so desperate for quick cash, they would have borrowed no matter what the loan terms.
Perception- May consumers don’t see having a payday loan or installment loan as incurring long-term debt.
Reliance- Consumers who apply with an online lender expect the companies to disperse accurate, honest and reliable information.
Focusing on loan fees- Often times borrowers only focus on how much they will pay in loan fees; not how repayments will affect their budget.
Trusting a lender- Some borrowers see bank payday loans as more trustworthy than non-bank direct loans.
Temptation- Borrowers reported that payday loans are tempting because they are so easy to obtain when it’s difficult to meet monthly living expenses.
Working with direct payday lenders may seem fast, convenient and easy. But paying the full amount back on time can be a lot harder than many consumer’s realize. For those who have unrealistic expectations of taking out a short-term loan, it may be difficult to repay the loan. Serious consideration should be taken before entering into any type of transaction where there is money being loaned out.