The payday loan is classed as a short-term debt instrument, usually requiring payback within fourteen days or less. Makes sense, right? You get a loan until next payday, then it’s due. Although the quick cash infusion might help you this week, ruinous interest rates can leave you grasping for funds as the next pay period winds to a close.
In states where usury or predatory lending laws are limited, the payday loan has blossomed into a major business. With the advent of web-based financial products and services, the payday loan business is flourishing even in those states which have enacted predatory lending laws. Spam, banner advertisements and thousands of similar concepts have been used to push the loans and individuals with poor credit histories or high existing debt payments and limited income are especially vulnerable to this industry.
Although the temptation to get enough money to make the current crop of bill payments and still be able to buy food may be overwhelming, it behooves even the most cash-strapped borrower to review the nature of the loans. Most interest rates on payday loans start around 640% annualized, if you consider that the $25 interest charge on every $100 borrowed is standard. However, it must be noted that the $25 per $100 is a fixed level. Even if the loan is only for one day, the charge is the same, leading to an equivalent annualized interest rate that can exceed 2000%.
Generally, payday loans are secured by personal check and verification of employment. Most payday loan lenders require two forms of identification, two pay stubs or a letter from your employer with details about your job, at least one utility bill (to establish residency), a checking account (they require you to write out a check that they can cash if you try to default on the loan), and between three and five personal contacts. Although most say they only use the personal contacts when they cannot get in contact with you through the phone number or address you supplied, there is generally no guarantee that they will not use the list for marketing purposes, nor is there any guarantee that the list will not be sold to data brokers for subsequent resale.
The problems with payday loans have long been recognized by debt counselors and the like, but have been allowed to flourish under a generally lax system of conflicting laws. In some states, it is illegal for credit card companies to charge more than 28% interest and the law frequently also limits the amount of interest that can be collected on other long-term debt instruments. However, fees of lending institutions have largely gone unnoticed and unregulated; the vast majority of payday loan brokers charge the $25 per $100 as a fee, not as interest.
Finally, the frequently underpaid military households are especially vulnerable to this practice. The government is notorious for mixing paperwork and botching checks, and it is not unusual for a young military family to be short of cash as the red tape is slowly unsnarled. However, borrowing at a high rate of interest does not prevent the crisis the next time, and may exacerbate it. If debt climbs steeply, additional problems may result, including issues with security clearances and promotions. There are faster routes to a dishonorable discharge, but few more certain.
Recently, legislation has been proposed to reign in these types of loans, but little has as yet been enacted. It may be necessary to enact such a law at the federal level, since the Internet has become a choice medium for such lenders. In your best interests, I strongly suggest that you avoid these loans like the plague they are; consider debt counseling and restructuring as an alternative to these financial vampires.