Payday loans are credit facilities that are designed to be advanced in short terms. The concept of ‘Payday Loans’ is not new, especially if you live in the western part of the world. There are numerous debtors who prefer to avail this facility and borrow money during demands, preferably repayable by the next payday. But is the picture so rosy? Like all other private lenders, payday loans also have some hidden facts and dubious lending practices that can easily trap a gullible borrower.
Here is a list of unfair practices that your payday lender will never reveal.
- Exorbitant interest rates
Payday loans are available under the guise of easier loan terms, faster processing, flexible payment terms, and waiver of credit checks. However, all of those good things also come with an interest cost in the form of an ‘Annual Percentage Rate’. This interest rate can extend up to the 700th percentile of the loan amount and increase a borrower’s financial obligations.
A borrower should check and compare interest rates among various lenders and negotiate lower interest rates before immediately accepting the loan offer.
- Loan Rollover Charges
Payday lenders offer renewal payday loans when borrowers fail to pay debts on time. However, a borrower fails to understand that this useful trend has reinvestment costs associated with it, which is enough to squeeze the blood out of the body. Borrowers do not realize the increase in liabilities when they are mesmerized by the lenders’ sweet words.
- Multiple loan trap
In many cases, a borrower is unable to project the exact cash requirement and ends up borrowing less money. When the borrower approaches a payday lender for an additional line of credit, he also pays the excess loan charges for the increased value of the loan. This additional fee is added in lowercase letters in the loan agreement documents that borrowers do not read.
- Check bounce penalty
A payday lender can charge hefty criminal fees in cases of bounced checks or declined automatic debit transactions. This penalty could be extended to a quarter of the outstanding amount of the loan.
Apart from this, all payday loan agreements contain a clause that allows the lender to initiate legal action in the event of non-payment of the installment within a week of the bounce of the check. Criminal charges combined with the debt can even add up to twice the loan amount and trap the borrower in a vicious cycle of financial and legal problems. Therefore, a borrower must ensure that sufficient funds are available in their repayment account on the day of the installment.
- Bodily presence of payday lenders
Not all payday companies have a physical presence in the area of operation. Most of them are shell corporations that disguise their individuality with false business labels or offshore corporations that have their registered offices in tribal lands or places like Costa Rica etc. Such entities are exempt from all federal regulations and therefore it is very difficult for the borrower to sue the lender for charges of illegal practices.
A borrower should ensure that their payday lender has a corporate office near their place of residence or at least in the same country. You should beware of third party lenders or online lenders without specific contact details. Registered lenders may perform certain identity and credit checks, but are governed by state regulations. This can be beneficial to the borrower by providing lower interest rates and other related fees.
The Office of Fair Trading also cracked down in 2013 and several lenders closed or withdrew their lending business. However, a borrower must also be careful when availing a payday loan, whether online or at the store’s office.