Tuesday, May 22, 2012

PayDay Loans a scam?

What Are PayDay Loans?

PayDay Loans are small companies that are geared to providing small loans to individuals. They have become one of the most popular alternatives for getting loans. I mean yes it's still a loan but it's a lot easier to obtain than getting a loan from a financial institution. Especially for those that have poor and or bad credit! These companies (PayDay loan companies) generally have a max limit of 0 dollars and they secure this loan against the borrower's paycheck.

Paying back your loan

Unlike most lines of credit or loans that allow you 28-30 days or sometimes even 6-months to a year (depending on the financial special running) to pay them back. PDL only gives you 2 weeks... 2 WEEKS! Now to some that's perfect and the time frame is reasonable because some people take out these small loans for emergencies. They need money right now and can't wait a couple days for their paycheck and that's fine. Seems like a great idea, real nice service right?

Interest Rates

The downside of PDL's is they have a huge interest rate 318% (apr) sometimes up to 512% that insane. This actually keeps the borrower indebt if you ask me because now they are trapped! What's to be paid back in 2 weeks may now take a month or 2 just to cover the interest! Let's plug in some numbers here so you can get a visual of how much gauging is going on 21.2 % of 500 is roughly 105 dollars... Does anyone see the problem here?

Solution

Right now democrats are actually trying to limit the interest rate of these companies to 36% which is fair but some argue that it will kill a lot of PDL's business and it's true to an extent. A lot of these companies have other streams of income besides gauging the borrowers. They cash checks, produce money orders and they do money transfers. What will end up happening (if this bill passes) Pawnshops will see an increase in business because people will then go to them from small loans. In fact pawnshops could sore from this little economic change.

Alternatives to obtain loans

You could always seek out credit unions as they are willing to work with individual's a little more than bigger financial institutions and the interest rates are pretty reasonable. Small installment loans is another option you may want to take a look at again interest rates are reasonable.

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