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What are the benefits of consolidating my loans?

Main benefits of loans consolidation

  • Main benefits of loan consolidation
    Main benefits of loans consolidation

    The main benefit of loans consolidation is that you just have a single monthly payment to deal with. The consolidation replaces multiple payments on different loans with a single payment on the consolidation loan. For example, a studentmay graduate with as many as a dozen loans. Consolidation will combine them into a single loan with a single monthly payment, thus simplifying the repayment process.

  • Secondly, there are alternate repayment plans that lead to more manageable monthly payments. Debt consolidation loans provide access to alternate repayment plans, such as extended repayment, graduated repayment and income contingent repayment. Although such plans may be also available to unconsolidated loans, the terms of an extended repayment plan depends on the loan balance, which is higher on a consolidation loan. Turning to alternate repayment plans often reduces the size of the monthly payment by as much as 50% by increasing the term of the loan. This can reduce monthly payments, making them more affordable and manageable. However, it does increase the total interest paid over the lifetime of the loan.
  • Loans consolidation also reduces the interest rate on some PLUS loans. For example, consolidating an 8.5% fixed rate PLUS loan reduces the interest rate by 0.25% because of the lower 8.25% interest rate cap on consolidation loans. In order to maximize the interest rate reduction, the PLUS loans must be consolidated only by themselves. It is also advisable to consider the impact of consolidation on student loan discounts.
  • Loan consolidation resets the 3-year maturity of certain deferments and forbearances. A consolidation loan is a new loan with its own deferments and forbearances.
  • Loan consolidation is useful tool for medical school students
    Loans consolidation is useful tool for medical school students

    Loan consolidation is a useful tool for medical school students because they do not get an in-school deferment during the internship and residency periods. They are, however, eligible for an economic hardship deferment for no more than three years. Therefore, if they need more than three years, loans consolidation is a practical and appropriate tool for that purpose.

  • Consolidation restarts the loan term on loans that are already in repayment. Even if your loans have a standard 10-year repayment period, by consolidating them when they are already in repayment, you will reset their loan terms since a consolidation loan is a new loan. This can give you similar benefits to these of an alternate repayment plan. It may yield a lower monthly payment without extending the term.

    On the other hand, consolidation should be avoided when you are close to the end of your repayment term because you won’t save much.
  • Consolidation allows you to change lenders, thus providing better loan discounts. Consolidating your loans allows you to choose between lenders. If you take the time to shop around, you may be able to find a better discount on loan interest rates and better rebates on the fees.
  • Loan consolidation for educational loans is sometimes necessary for graduate students when applying for a mortgage on a house.
  • For some borrowers with poor credit score, there are specialized debt consolidation loans for bad credit. They come in use when those borrowers are denied of standard loans. Also, there is payday loan consolidation for those borrowers who have taken out payday loans.
  • Extended repayment is not mandatory. On the contrary, it is an option. This means that you don’t have to extend the repayment term because this may increase the total interest paid over the lifetime of the loan. Some lenders even encourage borrowers to extend the repayment on their loans. Therefore, you should be careful when deciding whether to extend the repayment.

    Moreover, borrowers are not required to choose an alternate repayment term. They can use the standard 10-year repayment even if they consolidate their loans. It is advisable to keep a standard repayment term as this minimizes the total cost of the loan. Extended or alternate repayment term should be chosen only when the borrower experiences trouble with his monthly payments. An alternate repayment term can reduce the size of the monthly payments by as much as 50%. However, this comes at the cost of increasing the total interest should be paid over the lifetime of the loan by as much as 250% or more. Alternate repayment plans can increase the total cost of the loan by thousands or even tens of thousands of dollars.

What will my payments look like each month?

Consolidating loans can significantly reduce your monthly payment
Consolidating loans can significantly reduce your monthly payment

Consolidating your loans can significantly reduce your required monthly payment because they are usually amortized over 10 or 15 years. When you choose to consolidate, you may be eligible for a longer repayment period. The time period during which you have to repay your consolidation loan depends on your consolidation loan balance. This means that you are able to extend the amount of time from 10 years to up to 30 years, allowing you to pay a lower amount each month.

  • Don’t forget that when you have a longer repayment term, your monthly installment amount may drop down because you will have more time to repay the debt. However, longer repayment terms usually means that you will have to pay more over the life of your loan in interest rate.
  • If your current loans have variable interest rates, consolidating will allow you to have a single fixed interest rate for the life of the loan. This fixed rate is based on the weighted average of all interest rates on the loans being consolidated. If you are a student, you can review your loan details and interest rates by logging into the National Student Loan Data System (NSLDS) with your federal ID.
  • Consolidation also affects the way loans are serviced. Loans consolidating makes it easier for the borrower to manage the loan debt. The borrower will receive one bill and make one payment every month for all the loans included in his consolidation.
  • Most bill consolidation loans offer a lower interest rate than those you’re paying on your existing debts combined. As a potential borrower, you should make sure that it doesn’t change over the life of the loan.
  • how much he will have to pay?
    how much he will have to pay?

    Before signing any agreement, the borrower has to be sure that he knows exactly how much he will have to pay each month and that he can afford it. The monthly payment for the consolidation loan lender should be less than the payments to all other creditors combined.

  • Sometimes loans consumers who consider taking out a consolidation loan are unable to make all monthly payments. Therefore, the potential borrower should make sure that the new loan offers him savings over his current total monthly payments.
  • Along with the interest rate, monthly payment amount and monthly savings, the borrower should check the total interest he’ll be paying on the consolidation loan. The amount may seem high but it’s usually much less than the interest he would have paid if he had continued paying all former creditors individually – especially if he’s only making minimum payments. It is possible to reduce the amount of interest through an alternative payment plan which sometimes allows early pay off of the loan.
  • Some lenders may offer flexibility in the due date of your bill consolidation loan. If you paid twice a month – for example, on the 1st and 15th – you may ask to set a due date that corresponds with your paycheck’s schedule to be able to make your monthly payment.
  • The lender should tell you the exact terms of your bill consolidation loan. It should typically be provided in months rather than years. For example – 36 months rather than 3 years. Make sure you’re comfortable with the repayment period of the loan.
  • The lender may offer flexible due dates as well as alternative payment plans, such as weekly or biweekly payments. Many loan borrowers find it easier to spread payments over two or more per month, rather than repaying all at once. This may also help paying off the bill consolidation loan more quickly. Be sure to ask how such an alternative payment schedule may affect the interest you pay over the life of the loan.
  • Always look for a consolidation loan lender who doesn’t charge a pre-payment penalty for paying off your consolidation loan earlier. A reputable lending company will not charge a fee for an early payoff as their goal is to help their clients get out of debt as fast as possible.
  • A reputable lending company will offer their clients fast and effective ways to get in touch with them. You should know the ways to keep in touch with the company handling your bill consolidation loan and whether you’re assigned a personal loan representative or not. You should keep all phone numbers, email addresses and websites accessible in case you’ve questions or concerns.
  • How long will the loans consolidation process take?
How long will the loan consolidation process take?
How long will the loan consolidation process take?

A common question borrowers will ask is how long it will take to get a personal consolidation loan.

  • Typically, it would take between 30 to 60 days from the approval of the loan until the loans consolidation is complete.
  • Nevertheless, if the borrower provides the lender with all the necessary information, this may help significantly reduce the time required to pay off the old loans.
  • Borrowers should continue making payments on their loans until the lender notifies them that this isn’t necessary anymore because the loans have been paid off. If an overpayment occurs, it will either be forwarded to the new lender or be refunded to the borrower.

 

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How use loan consolidation wisely

How use loan consolidation wisely
How use loan consolidation wisely

How to get loan consolidation

The most important thing is that you are completely aware of your financial situation – how much you earn, how much you owe, when are the bills and debts due. That will help you understand when you are in trouble and need a solution. Loan consolidation is a widely used method for getting out of financial problems. In this article, you can find further information on its characteristics, benefits, how to get one and use it wisely in the article. There is also additional information about the other options available.

  • Loan consolidation explained

Consolidation explained
Consolidation explained

The term consolidation comes from financial accounting and is often referred to consolidation of financial statements when there are subsidiaries reporting under the parent company. In more general terms, it means combining two or more financial items like assets into one. When it comes to personal finances, it is used for merging multiple debts, high interest rates and credit card debts into a single one. That makes the payments far more manageable. The interest rates are usually lower so it is beneficial. Loan consolidation is done through a debt consolidation loan.

A consolidation loan is a loan that you take in order to repay your other loans. You need to consolidate your loans to be able to do that. After consolidating your loans, you no longer owe your previous creditors – you just need to repay your consolidation loan lender. You are supposed to use the money from this loan to pay off the other creditor completely. Consolidation loans are beneficial because they reduce the monthly payments you have to make. That is usually done through extension of the payment period or a reduction of the interest rate.

  • Payday loan debt consolidation

Payday loans are normally short-terms loans. However, if you are late in your payments, there is a possibility to renew it for another payday period and that can happen a certain number of times. In those cases when you already have a payday loan for a while, the interest rates will start adding to the amount you owe. When you have several payday loans that are overdue and even if they are not, you may want to consider consolidating them. You can get a loan consolidation loan and repay all your payday loans in full. That will help you avoid further complications the high interest of payday loans and the payday loan debt cycle. Payday loan debt consolidation is one of the best ways to reduce the current number of your payday loans. That will save you a lot of time and money since payday loans have one of the highest interest rates.

  • Other lending options

The two main alternatives to loan consolidation are debt settlement programs and debt negotiations. You need to understand the differences of these methods.

With a debt settlement program, you will also get a reduction in the payment. However, unlike with a consolidation loan, there is a middleman – the debt-settlement agency. Its role is to negotiate on your behalf with your creditor to try to reduce the interest rates. That makes it easier for you since you don’t have to do it yourself. Of course, the debt settlement agency does that for a fee. However, with a consolidation loan, all that is avoided and no fee is charged. Another difference is that with a debt settlement program, you pay the debt settlement company. That can be done in a lump sum or in monthly payments but you don’t pay your creditors off directly.

Debt negotiation is a kind of a settlement. You pay your creditor a certain part of what you owe and he agrees not to seek the rest. It is hard to achieve and there are many possible scams. It is far more secure to simply consolidate your debts and repay them at once. Being debt-free is the best thing you can do and the best way to achieve it is through loan consolidation.

  • Why choose debt consolidation

  • Only one debt
Only one debt
Only one debt

Consolidating your debts solves many problems. You no longer have to worry about due dates and creditors. From that moment on, you will only have one debt – the consolidation one loan and it is spread over a relatively long period of time and separated into small manageable payments. That makes it really easy to deal with. In addition, it will help you improve your credit score through having a history of many regular repayments.

  • Only one creditor

The benefit of having only one creditor is that it drastically reduces the number of calls, letters and emails you receive from your creditors when you are late on the monthly payments. Actually, with loan consolidation, the repayments are so easy to cope with you will probably not have such a problem at all. 

  • Simple and easy to achieve

Debt consolidation is one of the easiest ways to become debts-free. All you have to do is get a consolidation loan and repay everything else you own in full. Receiving such a loan is not that hard in the first place and because of preferable conditions it offers, it is really easy to pay it back afterwards.

  • How to get debt consolidation

  • Know your credit score
Know your credit score
Know your credit score

To get a debt consolidation loan, you will need your credit score. The terms of your future loan will be widely based on your credit history so it is very important that you have it up to date. It is also important that it is accurate. The higher your credit score, the better loan terms you will be able to get. So go over it and make sure everything is correct and updated.

 

  • Know your options

Depending on your goal, there are different options you may want to consider. You need to find the balance between your needs and what can be realistically achieved. You need to figure out what is the best way to achieve it.

  • You want to save money

Loan consolidation offers you a very good chance of saving money through its lower interest rates. If you are not late on many of your payments and you are in not so much trouble, you can try to prioritize your debts and pay off the most urgent ones first. You should be careful because some loans have penalties for early payments. Go over your debts and read the terms once again very carefully. Decide whether to try to balance all the debts or take the highway and consolidate them. Consolidating is a simpler solution than having to keep track of all the details. So if you are not very good in math and you are not highly organized, consolidation may just be the best option to achieve your goal.

  • You want a lower interest rate
You want a lower interest rate
You want a lower interest rate

One of the main advantages of debt consolidation is having a lower interest rate. In some cases, it is possible to achieve this goal through another means. You can call your credit company and try to renegotiate your terms with them. You need to have a really good credit score to be successful in such negotiations. In case your offer is rejected, you may then try to switch to a credit card with no interest or at least one with lower long-term payments. Of course, all that is not possible if you don’t owe a credit company but several different creditor. In that case, you would have to try to re-negotiate with all of them which can make the task far more difficult. In addition, they may not be willing to agree and they have no obligation to comply with your requirements. Therefore, it will be much easier to consolidate your loans into a single loan with a single creditor.

  • You want to be on top of your financial situation

Debt consolidation gives you a rather good sense of control. Once you have your debts consolidated, you can track your payments easily. If you are confused about your finances, you can try contacting a credit counseling agency. They will be able to advise you. However, take note that there should be no charge free and you should also be careful for scammers.

  • Find the right loan for your consolidation

There are two types of consolidation loans – secured and unsecured. The difference is that the secured ones are backed by collateral. Because of that, secured loans als have lower interest rates. If you have something to provide as collateral (your car) and you are sure you can keep up with your payments, a secured loan is a rather good way to go. You should consider the risks though. If you fall behind on your payments, your lender can foreclose on whatever you have provided to secure your loan.

On the other hand, unsecured loans are safer for you because you don’t have to risk any of your assets. It is also possible to receive a good deal for an unsecured loan but that will depend a lot on your credit score. If you have a good credit history, you should be able to get a good interest rate on your loan.

  • Compare lenders

Compare lenders
Compare lenders

When choosing a loan, you may also like to compare offers from different lenders. Do a little research, check different websites and see what terms are being offered. Make sure you understand all the terms, including the fees and other related conditions such as penalties. If you have questions, don’t hesitate to ask the lender or other people who have used his services before. You can also find a lot of useful information online.

  • Compare conditions

After you have decided what type of consolidation loan you want to take and which company’s conditions you like the most, don’t forget to estimate the real value of your loan. Don’t only look at the monthly payments. You should also consider all additional fees. It may turn out that you are turning a bad situation into a worse one if you don’t foresee  all the possible costs associated with the consolidation loan.

  • Know your contract

Read your contract very carefully. Read it until you make sure you have fully understood it. If it seems like there is something is wrong, check. Consult a lawyer if necessary. If you sign something that you don’t understand, it can cost you a lot later. Your signature is equivalent to your consent of whatever is stated in the contract. Therefore, read your contract carefully

  • How to use debt consolidation wisely

Try to repay your consolidation loan as quickly as possible. Keep up with your monthly payments even if it means you have to cut back on some other expenses for a while. The best thing you can achieve is being debt-free and that is only possible after you have repaid that consolidation loan. At some point if you have trouble with the repayments, you may consider borrowing from a trusted family member or a friend. The important thing is to repay the consolidation loan as soon as possible.

  • Cut back on expenses
Cut back on expenses
Cut back on expenses

To stay out of trouble in the future, try to cut back on unnecessary expenses. That will help you save money for bad days and you won’t need to borrow again. It is better to go without some little luxuries than being in debt.

  • Keep track of your money

Keep a regular budget to know how you spend your money. That way, you can be in control of your financial situation. It is useful if you list income and expenses on a chart which will give you a clear idea of how you’ve spent your money. Knowing where your money goes is essential.

  • Keep up the good work

Managing your loans, consolidating them, finding a decent lender…all these take a lot of effort. However, do celebrate the moment when you are debt-free and try to stay on top of your finances in the future.

 

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How to choose a good debt consolidation company

How to choose a good debt consolidation company
How to choose a good debt consolidation company

Having various sources of debt

If you are in debt and have multiple loans, there are some important factors you should bear in mind when deciding how to deal with them. One option is debt consolidation loan. The source of your debt may be a payday loan, residential mortgage, car loan, student loan, among others. You may choose a debt consolidation company as well.

Let’s consider the mortgage option. Even with the recent equity erosion in the housing market, you may still have high equity built in your property and should be able to either repay some or all your credit card debt or possibly get a lower interest rate. Of course, there are other factors that may affect your eligibility such as current FICO credit scores, income and other installment debt.

Bigger banks offer various programs and if they cannot offer you the terms you need, you could try consulting an established mortgage broker who has access to less restrictive and are more helpful towards your funding goals.

There is another option but you should consider it only as a last resort. This is debt consolidation loan provided by a debt consolidation company. You should avoid it because in most cases, it will negatively affect your personal credit. This is due to the fact that debt consolidation firms buy your debt for less than you owe which will leave a mark on your credit report. It is also possible to lose credit score points because not all credit cards may get paid off on time which may lead to having late payments posted.

Debt consolidation loans

Debt consolidation loan is, indeed, a possible solution when you have become financially overburdened with credit card or other debts. The process of debt consolidation means taking out a new personal loan that combines a number of your outstanding debts. The purpose of the new loan is to let you pay off the consolidated debts with having only a single repayment amount to manage every month.

choose good debt consolidation company
choose good debt consolidation company

The benefit of debt consolidation loans is that the new single monthly repayment on the consolidated debt is usually significantly lower than the combined monthly payments that were needed to service the previously unmanageable debts. The new loan is usually made at a lower interest rate than the average interest of the previous ones combined. However, all customers are advised to exercise caution and due diligence when considering a debt consolidation company. On the market, there are debt consolidation services that indeed offer lower monthly payments and interest rates. However, at the end of the day, they may turn out to cost you more money as the loan term is extended for a longer period of time.

Debt consolidation company

You should choose your debt consolidation company wisely. Go for the one with a better reputation and with better terms. Reputable debt consolidation companies negotiate with creditors to lower the total amount of debt owed even before putting together a debt consolidation loan rather than only providing a new consolidation loan to cover the existing debt. That way, they manage to provide genuine, substantial savings for the indebted customer.

Based on reviews from various consumer websites, these are the attributes which reputable debt consolidation companies have:

According to number of sites and articles that review debt consolidation companies, the highest ranking company has an A+ rating from the Better Business Bureau (BBB) and is accredited by the BBB, the American Fair Credit Council (AFCC) and the International Association of Professional Debt Arbitrators (IAPDA). This company is recommended because of its high level of transparency. It is transparent about its fees which the consumer is expected to pay which is 18 to 25%. The average debt reduction savings realized are also transparent — a net 30% after deducting the company’s fees. Unlike many debt settlement or debt consolidation companies, this particular lender can help both business and personal debt. Their debt settlement plans are designed to retire debt within a time frame of two to four years. The minimum level of debt required to qualify for their program is $7,500. They operate in 41 states.

A+ rating from the Better Business Bureau (BBB)
A+ rating from the Better Business Bureau (BBB)

The second ranking company offers a level of average net debt savings at 40% while their average fee is 20%. They also offer to consolidate both personal and business loans with a minimum debt requirement of $7,500. They sometimes work with customers with as little as $5,000 of debt, so it’s a good option to explore if you have lower debt levels. It is accredited by the AFCC and the IAPDA, but not by the BBB. It has an A+ BBB rating. Their website is consumer-friendly and provides an online customer service chat feature for those who may wish to ask questions online before making further inquiries with the company. Their debt retirement plans are also designed for a two- to four-year time period and are available in 38 states.

The third highest rated company has no minimum debt level requirement and their average fees range between 14 and 20%, which is approximately 5% lower than the average fee of most other high-rated debt relief services companies. They offer services in 42 states. Their services include personal and business debt consolidation plans with a time frame of 3 to 4 years. They are accredited by the BBB(A+ rating) and the IAPDA. Their website is transparent and easy to use.

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Things you should look out for in debt consolidation loans

debt consolidation loans
debt consolidation loans
  1.  General warnings about debt consolidation loans

 General warnings about debt consolidation loans
General warnings about debt consolidation loans

Debt consolidation loan can be an efficient solution to sort out problems with existing debt. This solution allows you to repay all your current debts and replace them with one simple consolidation loan. Thus, you’ll have a lower monthly repayment and will repay less on your debt over time.

Like any lending product, loan consolidation does not work for everyone and sometimes it should be avoided because it could actually get you into deeper trouble. For example, you should not take out a debt consolidation loan when the interest rate is so high that your monthly repayment will be more than what you’re currently paying or when you can’t afford the new loan payments. Also, when the loan does not clear all your debts or when your monthly repayments are lower but the loan tenure is longer. The total amount you will repay in this case will be more than the original debt.

Let’s take a look at several things you should consider before choosing loan consolidation:

  • Don’t opt for loan consolidation if it brings with it higher interest rates than those you are currently paying. You aim at decreasing interest, not increasing it. Sometimes, a lower interest is a given. For example, most debt consolidation loans will come with personal loan rates that are much lower than those you will be paying on credit cards. But, if the debt you want to consolidate has low interest rates or if your credit history is bad and you can’t get low rates, then loan consolidation will not work for you.
  • Do not take out a consolidation product if it means you will be spending more on servicing your debt monthly than you are already doing. Your goal here should be to decrease your monthly repayment and ease your financial commitments. If a consolidation loan will cost more, you may need to find another solution.
  • You should not take up a debt consolidation option if you cannot comfortably meet its repayments. This will only lead to more problems and you’ll find yourself in a worse financial situation. You should aim to have cash left every month after you’ve met all your financial obligations. If a debt consolidation loan won’t let you to have spare cash every month, then avoid it.
  • Look carefully at how long it will take you to repay the debt consolidation loan and how much you will repay in the end. In many cases, you’ll find that this can be a quicker and more cost effective route for paying back your debt. However, a longer loan term can mean lower monthly repayments, it can also mean a higher overall repayment amount.
  • If you currently have several unsecured debts and are encouraged to take out a secured loan to repay them, think hard before accepting this. It is true that your monthly costs may be lower, but you will need to put up your home or car as collateral. If your existing loans are unsecured, you don’t currently have that risk.

These loan solutions can work really well for some while being completely inappropriate for others.

  1.   Things to note when taking out credit card debt consolidation loans

credit card debt consolidation loans
credit card debt consolidation loans

To consolidate your credit card debt may be a good way to solve the challenges of high-interest debt. Thus, you can reduce interest rates and monthly payments, and repay your debt faster and more efficiently. However, when consolidation is not done correctly, it can lead to additional financial trouble.

Therefore, here are ten basic things to consider when using a credit consolidation program:

  • To stop accruing debt, stop spending excessively

When you consolidate, instead of balancing your budget, you continue to use your credit cards to get by every month. As a result, the credit cards keep adding to the debt instead of reducing it.

When you’re consolidating your credit cards, you should stop spending on credit until you’ve cleared the consolidated debt. Otherwise, you’re just generating more debt and bills. You’ll eventually get to the point where your monthly debt payments need too much money.

  • If you don’t have good credit, don’t solve your problems on your own

Most people prefer to solve their debt problems on their own so they don’t have to tell anyone else about them. However, this will work only if you have a good enough credit score to qualify for the low interest rates. If you consolidate with a higher interest rate, you won’t be able to pay your debt off efficiently.

You should try to consolidate at an interest rate that’s as close to zero as possible. So, if you’re doing a credit card balance transfer, you should aim for a card with a 0% APR introductory period. If you take out a personal debt consolidation loan, then you should aim at an interest rate around 5% and no higher than 10%.

  • Don’t secure unsecured debt

Don’t secure unsecured debt
Don’t secure unsecured debt

This happens with people with a lower credit score consolidate on their own. They don’t qualify for an unsecured debt consolidation loan with lower interest rates because their credit score is too low. Therefore, they apply for something similar to a home equity loan instead, so that the debt is secured with their home as collateral.

Credit cards are unsecured debt. Therefore collectors may threaten to but they can’t actually take your property without a court order. On the other hand, a home equity loan may lead to foreclosure. That is not worth the risk just to repay your credit card debt.

  • Asking for help is a good idea

One advisable option when consolidating debt with a low credit score is credit counseling. Thus, you can check whether you qualify for a debt management program. That way you can roll all of your debts into a single monthly payment while reducing or eliminating high interest charges. The low rates are guaranteed because the credit counseling agency negotiates with creditors on your behalf.

So, rather than securing unsecured debt with your house, you should look into a consolidation program through a credit counseling agency.

  • Always consider the fees

There may be hidden fees that add to the cost and it may take more time for you to pay off your debt. Most debt solutions do cost something, but the cost may vary, so check it before consolidating your credit card debt. Let’s say a balance transfer credit card usually has a 3% fee for every balance you move to that card. It may go up when you have higher debts or multiple debts on different cards.

For debt management programs, the fees are based on your budget.

  • Don’t give up and return to excessive spending

When people find out about consolidating, they’re excited to have a solution. Nevertheless, as time passes, some of them get tired of budgeting and after several months, they go back to excessive spending. This has a negative impact on their ability to avoid bankruptcy and their credit score.

When on a debt management program, they may drop off the program by the sixth month. However, remember that if you leave the program, your original interest rates and penalties can be reinstated. You have to stick with the consolidation program up until the end of it.

  • Consolidation is not the same as settlement

There are commercials that urge you to “settle your debt for pennies on the dollar”. Don’t let them confuse you – that is different from consolidation. Consolidating credit cards with or without a debt management program and going through a debt settlement program are two separate things.

All consolidation options will pay off the debt in a way that works for your budget, meaning lower interest rates and lower monthly payments. That’s different from settling your debt for less than you owe. Consolidation helps you keep your credit score up as long as you keep up with your plan. Settlement always has a negative impact on your credit score.

  • Be alert of new financing

When turning to debt consolidation, there is nothing that can stop you from seeking financing – whether it’s for a new house, car or a new credit card. You’ll be able to open new accounts and to get approved for loans you need. Actually, it may be even easier to get approved since consolidation will help with fixing your debt-to-income balance. If you use a debt management program, your credit cards will be frozen and you won’t be able to open new credit card accounts. However, you’ll still be able to get financing for a mortgage or auto loan.

You may be able to get financing, but this doesn’t mean that you should. Any changes to your debt while working to eliminate it should be avoided. You may take out a loan and also want to buy a new home or car, but proceed with caution. Therefore, it is advisable to consult a certified credit counselor. The advice is free and you can get expert opinion on your situation.

  • Keep track on your credit once the debt is repaid

Keep track on your credit once the debt is repaid
Keep track on your credit once the debt is repaid

Once your consolidation plan is completed and all your credit card debt successfully eliminated, you have to check your credit report to make sure it reflects the financial state you achieved. Creditors send the credit bureaus updates when an account has a change, but information transfer can sometimes be slower and you won’t immediately enjoy the benefits of eliminating your debt.

You should check the credit report for the following:

The account information should have been updated to reflect zero balances. If you go through a debt management program, the credit history of each account should reflect that you made all payments on time. If you paid off a collections account, it should be closed. If you negotiated to have that account removed in exchange for repayment, make sure it is actually closed. Check that all your account statuses are listed as current. Once the updates are verified, any outdated information will reflect your actual positive financial standing.

  • You should learn from your mistakes

To avoid finding yourself in the same situation six months to a year from the moment you repaid your debt, you should not get back to overspending and relying too much on credit cards. You won’t get penalized for consolidating or even consolidating multiple times, but this doesn’t mean that you should not avoid financial distress.

Once you’re out of debt, you should create a budget that allows you to reserve credit cards for strategic use and emergencies only. Also, establish an emergency savings fund to cover unexpected expenses without pulling out a credit card. Another advisable strategy is to keep an eye on your credit card debt ratio. Credit card debt payments should take up no more than 10% of your monthly income. If you spend more than 10% on them, you need to take steps to reduce your debt beforeresorting to consolidate again.

  1.     Student loan consolidation warnings

Student loan consolidation warnings
Student loan consolidation warnings

Student debt consolidation is highly advertised, but it may not be suitable for everybody. Although it has 6-month grace period before the first payment on your loans after graduation, remember that if you don’t begin making payments after this timeframe, your interest will accrue and your debt will continue to grow.

The Consumer Financial Protection Bureau estimates that there is currently $1.2 trillion in outstanding student debt in the U.S.A. Around 7 million of the debtors are currently in default. This means a great potential for scammers. As debt grows, most debtors become overburdened, anxious and desperate and therefore very susceptible to trickery.

Most scammers aim at students during this six-month grace period before their first payment is due.

  • Several scams to avoid:

  • Several scams to avoid
    Several scams to avoid

    The upfront fee scam that involves a “company” declaring that they can minimize interest rates for a low fee upfront. Actually, they are charging a premium fee for them to go to your lenders and arrange for some kind of debt forgiveness or consolidation. You can do this on your own without this fee.

    No legitimate lender will require an upfront fee although some of them may require a percentage payment on your balance in the end. Private lenders might charge an origination fee, but this is negotiable.

  • The elimination scam involves someone offering to wipe out your student debt. Actually, this is impossible because no one can eliminate your private student debt.
  • Obama forgiveness scam. Although President Obama has put great efforts to ease the burden of student debt, you should familiarize yourself with his initiatives.
  • Power of attorney is a dangerous scam and you should not sign papers allowing someone else to hold power of attorney over you without a lawyer present.
  • If the consolidation company doesn’t provide information on phone numbers or address, this may mean that you are dealing with a fake consolidation company that is hiding behind a website. Every legitimate company should have a way in which consumers can contact them.
  • Finding a reputable debt consolidation loan company:

  • Check to see if they’re registered with the Association of Independent Consumer Credit Counseling Agencies and the National Foundation of Credit Counseling. They have lists of companies that offer legitimate debt consolidation services. Not all companies will be registered in either one of these databases, but many are and you can trust that they’re reputable.
  • Check the Better Business Bureau website that lets consumers rate different businesses and allows users to search for any open court cases against companies. If a company doesn’t appear on the site, this doesn’t necessarily mean they’re not legit. However,  those who have built up a reputation for scamming will usually appear there with bad ratings.
  • Call your current lenders. Most of them are willing to work with you to come up with a plan for repaying because they would rather want their money back than to see you to go into default.
  • In conclusion:

    Beware of companies that either make up a program that doesn’t exist, or describe a government program like it’s their own or say they have special methods to access it.

    Call the companies through whom you already have loans and ask about any forgiveness or consolidation programs they have.

    Don’t give anyone your social security number or bank account information via email, especially if their emails are written in poor English or deals that sound too good to be true because they are probably scams.

    A consolidation company should be able to let you feel secure about refinancing. If after dealing with them, you do not feel at ease, you should definitely do a background check on them. Student debt consolidation should be a positive step towards getting out of debt.

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Payday loan legal options

Payday loan legal options
Payday loan legal options
  • Payday loans from the legal perspective

Payday loans from the legal perspective
Payday loans from the legal perspective

For a lot of people, a payday loan is an easy escape from complicated financial situations. In case you are in urgent need of money, you just apply for a loan to cover the bills. However, it is not always that simple. Payday loans have certain legal implications. To better understand some of the problems that may arise from taking out legal payday loans, you may need to understand it from a legal perspective.

  • Facts

  • The average payback period is 14 days.
  • The average loan size is $370.
  • The average fee is $25 per week.
  • The borrower can pay by a post-dated check for next payday period.
  • Most borrowers give the lenders electronic authorization to withdraw the money directly from their bank account.
  •  If there is no money in the bank account or the check doesn’t encash, further fees are imposed.
  •  Almost 6% of American adults have used legal payday loans.
  • The average borrower has the loan for approximately 5 months.

        More than 70% of the borrowers take out more than 2 payday loans a year.

  • Are there legal payday loans?

legal payday loans
legal payday loans

Yes, they are legal. Payday loans were created to help people cope with some financial difficulties or unexpected emergencies that lead to additional bills. However, there is currently no correct answer to this question. It depends on which state do you live in. The state regulations on legal payday loans vary from State to State. For example, New York has forbidden them altogether. That means that any form of legal payday loans is illegal there. The situation is more or less similar in North Carolina. Of course, there are various approaches to the regulation. Other States try to regulate how high the interest rate can go. In Arizona, it is forbidden for payday lenders to offer interest rates that are higher than 36% while the maximum allowed interest rate is 24% in  the District of Columbia.

Online payday loans raise a separate legal problem. Since you can apply and receive an online payday loan from virtually anywhere, what happens when you apply from a State that has certain regulations on the matter. Do the regulations apply? The answer is yes. That means, there is higher chance that your loan is not legal with online payday loans. There is only one way to avoid that – check online for your State regulations. Almost every State Attorney General web page has detailed information on the matter. That is one of the most credible sources you can use. In addition, if you have any doubt, you can always call the authorities and make an inquiry.

  • In which States are payday loans prohibited?

According to the latest data, payday loans are prohibited in the following States: Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. In Hawaii, Kentucky and Utah, on the other hand, payday loans are only legal when it comes to check cashiers. Don’t take payday loans or online payday loans in one in those States. It most cases, it won’t even be possible as online lenders have to confirm your State of residency. Look into other options such as credit cards or lending from a bank or other forms of loans.

  • What is debt rollover ? Are they legal?

What is debt rollover ? Are they legal?
What is debt rollover ? Are they legal?

One of the main traps a payday loan can lead you to is a payday loan debt cycle. It occurs when you take out another payday loan to repay the first one and that keeps on repeating. The other option is to get your payday loan renewed for another payday loan period. You may need to resort to that because of the payday loan’s short-term nature. It normally has to be repaid in two weeks and naturally that is not always possible. In some cases, your creditor can automatically renew your debt if he has authorization to take certain amounts of money directly from your bank account. That renewing of course comes with a small fee. It is also known as a debt rollover. It can be dangerous because during the time of your new payday period, the interest rate keeps adding to the amount you owe. That is why in some States, debt rollovers are prohibited.

Debt rollovers are not legal in Arizona, Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. In the other States they are limited to a certain amount. For example, in Alabama, Colorado, North Dakota, Rhode Island and Wisconsin, your payday loan can be legally renewed only once. The maximum number of times for renewal is 6. However, there is an additional restriction there – the lender must reduce the principal amount of the loan every time there is a renewal by as much as 5 %. Other States that allow many renewals are Delaware and North Dakota, where up to 4 renewals are permitted.

  • How are payday loans regulated?

Payday loans are regulated on the federal and State levels.

At the National Conference of State legislators, you can find the latest bills adopted in each State as well as their summaries. Those include whether a license is needed for establishing a payday loan business, caps on fees and interest, the maximum number of loans per person and others. You should keep in mind that there is one principle act in each State and it could be changed periodically. It is important that you have checked the latest developments for your home State.

Payday loans are short-term loans for small amounts of money. Therefore, some States have even regulated the maximum amount of money that could be lent as a payday loan. Those amount are regulated either by fixed numbers which vary from $300 up to $1000 or they are pegged to the gross income of the borrower. For example, in New Mexico, it is forbidden for licensees to give a consumer a loan if his debt exceeds 25 % of his gross income.

Apart from the regulation on the number of rollovers, there is also a regulation regarding the maximum loan term. Again, there are different approaches. For example, in Alabama, there is a 10-day minimum period combined with a 31-day maximum period, while in California, there is only a maximum period regulation of 31 days. In Delaware, that is doubled – up to 60 days.

On federal level, the Federal Trade Commission is the regulatory authority. Its main objective is to protect consumers against payday loan scams. From a legislative point of view, the Federal Trade Commission Act, the Truth in Lending Act, the Credit Practices Rule’s, the Electronic Fund Transfer Act are very important. The Fair Debt Collection Practices acts is one of the most important which you should know as a consumer. It is the federal regulation that applies to debt collectors and it stipulates that they cannot resort to harassment and abuse. Moreover, they are prohibited from using unfair practices and misleading misinterpretations to confuse and scare you. Don’t let yourself be bullied and if you have any doubts, check your rights with the authorities. Don’t pay until you are sure what the consequences are. They will be different depending on your circumstances. Plus, the Commission deals with the so-called phantom loans. That means if you think you are victim of them, you can contact the Commission, report to them and get some help.

  • What are phantom loans and how to deal with them?

What are phantom loans and how to deal with them?
What are phantom loans and how to deal with them?

Phantom debt or zombie debt are outdated old debts that are no longer owed. There are certain legal provisions that if a debt is older than 2 or 3 years, it is no longer enforceable. It means that if you pay voluntarily, you don’t have the right to ask for your money back because there was an initial reason for your payment. However, you still haven’t paid and your debt is that old, you don’t have to pay it anymore. Furthermore, your lender or collectors don’t have the right to ask for payments from you or bully you into it. If anyone contacts you with such request and tries to bully you into paying, check your debt status first. Consult a lawyer if necessary. Then report the perpetrator to the Federal Trade Commission. The only way to get your rights protected is when you stand up for yourself.

Phantom debts also can be debts that never were yours to start with. Some people sometimes try to collect money from you for a debt that belonged to someone else with the same name or a debt from a deceased relative. However, it is well-known that debts end with death. If debtors can take something from the inherence, they will but under no circumstances should they ask the relatives directly for a full payment of the debts, especially when the debt is an old, long-forgotten one. In some cases, the debt in question has been paid in full or settled. Don’t let yourself to be trapped that way and take some action to protect yourself.

  • What happens if you don’t pay?

  • The lender can sue you
    The lender can sue you

    Your lender can impose a further fee because you didn’t have the money in your account or if you have closed it.

  • The lender can sue you. It is very important that if you get summoned to appear in court, you should do so. Otherwise, your lender may get a default verdict saying you are guilty based simply because of your failure to appear in Court. In any case, if a judgment is obtained, your lender may also be awarded for the costs that come along with the trial, including a reasonable amount for his lawyer’s fees.
  •  If you don’t comply with the due date, the lender may start to accrue more money on the principle amount, thanks to interest rates. Normally, the interest rate is limited to approximately 6% per year.
  • Your lender has the right to list your past due accounts with credit bureaus. That will have harmful effects on your credit score. In addition, it may prevent you from getting any loan in the foreseeable future and even influence your job opportunities.
  • Your lender cannot start legal proceeding until 60 days after the due date of your payment. It is highly recommended that you enter into some sort of negotiations to avoid going to court.
  • Conclusion

Payday loans are not always as simple as they seem and they have multiple legal implications. In case you need legal help with your payday loans, don’t hesitate to consult your lawyer and do thorough research online. There is almost no information you can’t find. When conducting your research, you should start from your State of residency. After that, you need to find the relevant State regulations and see what restrictions are imposed on legal payday loans. Don’t forget that there are also federal regulations. In case you feel you have been a victim of a payday loan scam, look into the federal laws and contact the relevant authorities that can help you. The most important thing is that you don’t take any rush action like paying up when you are not sure whether you should. In many cases, it may turn out that your rights have been violated. To make sure that you avoid any problems with legal payday loans, just repay in full once they are due. That is the simplest thing you can do. If necessary, cut back on expenses and try to repay payday loans in full when they are due.

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What banks should know about payday loan lenders

What banks should know about payday loan lenders
What banks should know about payday loan lenders

Lately, the number of payday loan lenders in the United States, and their critics, are growing in number. Many associate the payday lending industry with over-priced and un-regulated loans. However, that is not exactly the case. Very often, it is banking financial institutions (BFI) that have the greatest misconception of payday lenders, believing that they are predatory and take advantage of the borrowers. This mistaken belief can lead to banks considering payday lending firms as a liability rather than a potential valued client.

Proceed with caution when working with a payday loan lender

Proceed with caution when working with a payday loan lenders
Proceed with caution when working with a payday loan lenders

Payday lenders offer their customers short-term unsecured loans with high fees and interest rates. This type of loans is also referred to as deposit advance loans or payday advances. They are forms of credit that some customers may prefer for a number of reasons, including a situation where they cannot qualify for other credit sources. The borrower usually has to repay the loan back on the next payday. Which is why the loan is quite aptly called “payday loan”. This means that the application process usually includes a history of payroll and related employment records.

A growing number of payday lenders provide payday loans online. Consumers can even obtain a loan and authorize the repayment of its amount and fees during the same online session. A typical online payday loan scenario may go like this: the borrower obtains a loan and provides the lender with authorization to send Automated Clearing House debits to the consumer’s account at a later date for repayment. The payday lender’s bank originates the debits using the ACH network. Other payment options include wire transfer and remotely created checks.

Currently, both state and federal regulators are focusing on the payday lending industry in order to protect consumers from possible illegal payday loans. Payday lending practices are most commonly regulated at the state level. Some states completely prohibit payday lending while others have higher requirements towards lenders such as they have to be licensed and comply with maximum fees, loan amounts and interest rate caps, among other restrictions. The federal level regulations include the Dodd-Frank Act that has given the Consumer Financial Protection Bureau the authority to work against deceptive and abusive practices by payday lenders.

Payday lenders’ banks should bear in mind all the risks involved when working with online payday lenders. And such banks should make sure to incorporate due diligence techniques and to use all the available tools.

Reputation is of utmost importance

Reputation is of utmost importance
Reputation is of utmost importance

A high risk for established banks institutions is the reputational one. A payday lender’s bank should be aware that a business relationship of this type that includes ACH origination activity and a company making illegal payday loans can damage the institution’s image. The bank’s image can suffer even if the institution is not complicit in the illegal activities of its customer. But once the established financial institution determines that facilitating the payments of online payday lenders falls within its risk management model, it should ensure that it follows all applicable laws and regulations. One way to determine whether the AHC customers’ activities remain within the bank’s risk management model is to provide periodic reports on ACH customers to the bank’s board of directors. It is crucial for the bank to protect its own reputation as that affects every part of its business.

It is also important to know your clients and their practices

know your customer
know your customer

A bank working with payday lenders should also develop and follow adequate due diligence procedures. Both ACH rules and regulatory guidance require that banks perform “know your customer” (KYC) due diligence. These procedures include a variety of activities such as assessing the nature of the online payday lender’s activities, setting appropriate restrictions on the possible types of entries and exposure limits for the lender, and monitoring origination and return activity.

Due diligence steps usually consist of identifying the business’s principal owners, reviewing ratings for the business from various sources such as the Better Business Bureau, consumer complaint sites and credit service companies. They also include determining whether there have been recent legal actions against the business. Thoroughly reviewing the lender’s website, including the terms of the consumer’s authorization agreement and promotional materials, is advised. These due diligence practices on an ongoing basis for all merchants, not only online payday lenders, help the bank with choosing and using appropriate restrictions for the customer and therefore mitigate the risk of the bank discovering a problem when it is too late.

Being proactive is necessary to avoid problems

Being proactive is necessary to avoid problems
Being proactive is necessary to avoid problems

Banks can develop all kinds of tools that can flag potential problems in-house or can obtain them from other sources like vendors, ACH operators or NACHA. Additionally, incorporating a process to monitor transactions and returns can be used to identify anomalies, such as, for example, a sudden uptick in returns or an unusual increase in origination levels or average dollar amount. Detecting anomalies can be a sign to conduct further research on a customer.

Other tools can be NACHA’s originator watch list and vendor-terminated originator databases. They can help banks identify customers that may warrant additional scrutiny. Banks also conduct periodic audits in order to identify rules compliance issues.

For a bank, protecting its reputation is of utmost importance when it is considering offering payment services to high-risk originators like online payday lenders. The bank should proceed with caution when performing risk-based due diligence on new customers. After that, it should diligently monitor current customers so it can identify problems early and address them on time.

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Payday loans warnings

Payday loans warnings
Payday loans warnings

What are payday loans?

What are payday loans?
What are payday loans?

Payday loans are small loans that are used in cases of temporary financial emergencies.

Usually, these are short-term loans of a modest amount of money. To get a payday loan, the borrower typically writes a check for the loan amount plus a fee. The check might be left with the lender and he will cash it once the repayment is due.

If the borrower can’t repay when the loan is due, he can sometimes “roll it over” so that the loan is extended. However, the fees keep accumulating. Some states either outlaw rollovers or limit the number of possible renewals.

Payday loans are sometimes offered as “no credit check” loans. The borrower doesn’t need a good credit score and approval is easy compared to other traditional loans. As a result, they are popular among people facing financial difficulty.

Unfortunately, there are very few situations in which payday loans actually end up being helpful. Before you use one, make sure you understand the costs and risks.

Online payday loans warnings

Online payday loans warnings
Online payday loans warnings

When taking out payday loans online, you should keep in mind that the Consumer Federation of America (CFA) has long advised consumers to exercise extreme caution. This is particularly important when using internet payday loan web sites, where loans can cost up to $30 per $100 borrowed and the annual interest rates (APRs) are 650%.

According to a CFA survey, small loans that involve electronic access of consumers’ checking accounts pose high risks to consumers who are transmitting personal financial information via the internet. Online payday loans are popularised through email, online search, paid ads, and referrals. Usually, a consumer fills out an online application form with his personal information, bank account numbers, Social Security Numbers and employer information and applies for the online payday loan with copies of a check, a recent bank statement and signed paperwork.

Payday loans and access to customers’ bank accounts

Payday loans could cost up to $30 per $100 borrowed and must be repaid or refinanced by the borrower’s next payday. Let’s say that the borrower’s payday is in two weeks. A $500 loan would cost $150. This means that $650 will be electronically withdrawn from the borrower’s account.

Many lenders automatically renew loans by electronically withdrawing the charges from the borrower’s checking account on payday. If consumers don’t have enough money to cover for the charge or repayment, both the lender and the bank will impose insufficient funds fees.

High cost comes with high risk

High cost comes with high risk
High cost comes with high risk

Online payday loans are dangerous for cash-strapped borrowers as they combine high borrowing costs and collection risks of check-based payday loans with the security risks of sending bank account numbers and Social Security Numbers over web links to unknown lenders.

The CFA’s survey showed that loan amount could range from $200 to $2,500, with $500 the most frequently offered amount. Finance charges range from $10 up to $30 per $100 borrowed on a most frequent rate of $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in a couple weeks.

Not all sites will disclose the annual interest rates for loans or their finance charge before the customers complete the application process. The most frequently posted APR is 652%.

Although loans are due on the borrower’s nearest payday, many sites automatically renew the loan, withdraw the finance charges from the borrower’s bank account and extend the loan for another pay cycle. Some sites permit loan renewals with no reduction in principal.

Some lenders require consumers to take additional steps to actually repay the loan. After several renewals, some lenders require borrowers to reduce the loan amount with each renewal.

Contracts usually include a range of one-sided terms such as mandatory arbitration clauses, agreements not to participate in class action lawsuits and not to file for bankruptcy. Some lenders require their customers to agree to keep their bank accounts open until loans are fully repaid. Others ask for wage assignments even in states where they are illegal.

Therefore, CFA advises consumers not to borrow money based on giving a post-dated paper check or electronic access to a bank account. Payday loans are too expensive and too hard to repay on a short term. CFA advises consumers never to transmit bank account numbers, Social Security numbers or other personal financial information via the internet or by fax. Consumers should search for lower cost credit, comparing both the finance charge and the APR. CFA also urges consumers to seek credit counseling or legal assistance.

Payday loan pitfalls

High fees & interest rates
High fees & interest rates

The main pitfall with payday loans is their cost. The fees are extremely high and don’t help in solving the financial problem of the borrower. If the borrower is already having financial difficulties, payday loans can only make things worse because of their high interest rates. As a short-term strategy, payday loans may get the borrower through a rough patch. For example, for an emergency repair for your car so that you can get to work and keep earning income. As a long-term strategy, payday loans will probably only do more harm than good.

Bounced checks that the borrower writes to the payday loan lender can end up in his ChexSystems file and result in overdraft charges from the bank. Banks and retailers may then be unwilling to work with that customer. The lender may also sue him or send his account to collections, which will have negative impact on his credit.

Also, if constantly stretching out payday loans, the borrower will pay far more in interest and fees than he has ever borrowed in the first place.

Bank payday loans’ disadvantages

Banks are also acting as payday loan lenders, most likely in order to earn more revenue. While qualification for traditional bank loans is based on the customer’s credit, income and assets, they can be a better alternative. Bank payday loans are no better than common payday loans. Actually, they’re still expensive and risky.

In fact, payday loans from banks can be even worse than those from a payday loan store. This is due to the fact that the bank has access to the client’s checking account and he agrees to let them pull funds from it to repay the loan. If they want their money, they’ll take it as soon as it’s available, regardless of whether the client needs money for mortgage or car payments. When the borrower seeks financing elsewhere, he may have more control over how and when his money leaves his bank account.

Nevertheless, it’s possible that the bank can offer better terms.

The problem with rollovers

The core problem with rollovers is the “spiraling” fees. How do they work? If you have a job, a payday lending company will allow you to write a postdated check and will charge a very high interest rate. Suppose you borrow $300 for two weeks from a payday lender for a fee of $45 and decide to rollover the loan instead of repaying – you’re supposed to pay the $45 fee, and then will owe $345 or the principal plus the fee on the second loan. If you pay the loan then, you would have paid $90 in fees for a sequence of two $300 payday loans.

Payday lenders often advertise their two-week loans as the solution to short-term financial emergencies. Indeed, about half of initial loans are repaid within a month. However, about 20% of new payday loans are rolled over six times or three months, so the borrower ends up paying more in fees than the original principal.

Payday loans fill a niche – subprime borrowers who need money before their next paycheck.  Nevertheless, there are some shady practices in the industry which can trap borrowers in a cycle of dependency.

According to some researches, 20% of borrowers who roll over repeatedly are sometimes being fooled, either by lenders or by themselves, about how quickly they can manage to repay their loan. Behavioral economists have concluded that some people don’t always act in their own best interest – they can make systematic mistakes that jeopardize their own welfare. If chronic rollovers indeed reflect behavioral problems, capping them would benefit borrowers who are prone to such problems.

The CFPB warnings about the payday loan industry

The CFPB warnings about the payday loan industry
The CFPB warnings about the payday loan industry

The CFPB or Consumer Financial Protection Bureau is a new independent agency under the Federal Reserve of the US.

The CFPB can make rules that bind financial institutions and investigate consumer complaints about financial institutions. It can monitor and issue reports on markets and financial products.

The accounts they studied with identifiable payday loans paid an average of $2,164 over the 18 months studied, and $185 in overdraft and non-sufficient fund fees to their banks. Of those fees, $97 on average are charged on payment requests not preceded by a failed payment request. $50 on average are charged because of re-presentment of a payment request after a prior request has failed, and $39 on average are charged because a lender submits multiple payment requests on the same day.

It has become obvious that the number of completely successful borrowers was only half of the population of payday loan borrowers.

The “re-presentment” used by the CFPB, means the following:

Payday loan borrowers are among the lowest rated borrowers and they often do not borrow loans with the intent of repaying them. A lender’s’ strategy, therefore, is to split payments into multiple requests to try to recover at least some of the payment.  For example, a debt of $300 would be split into three requests of $100. After all, it’s better for a lender to receive some repayment than none at all.

However, if the first one fails and the bank charges the borrower an overdraft fee, would the lender keep trying to receive payment for the other two requests? Sometimes there is a grace period, but sometimes there are requests that happen on the same day.

Usually, 5-7 days or 14 days are the most common retry dates, with 2 weeks is the most common successful retry date. Some of the 0 day pings are successful but are causing overdrafts.

The people who take out payday loans are often desperate as they don’t have many other credit options to turn a 2-week paycheck cycle into real liquidity. Payday loans and auto title loans fill an underserved niche. Therefore, eliminating the industry will drive borrowers to pawn shops and illegal lenders and loan sharks.

The CFPB has proposed a framework to regulate payday loans. Google banned all ‘payday loan’ ads, defined as having repayment dates of under 60 days or effective APRs over 36% from the AdSense ecosystem.

Nevertheless, 50% of borrowers are completely successful with payday loans and cleaning up the industry could force them to seek out worse alternatives.

Tips when using payday loans

Tips when using payday loans
Tips when using payday loans

There are three important things to consider when taking out payday loans. First of all, you should be aware why are you going to use one. The average consumer can end up paying up to 400% interest on a two-week loan of approximately $100. Therefore, you should not take out a loan for general living expenses if you don’t wish to find yourself in a cycle of consumer debt.

They can be effective in meeting an unexpected purchase and providing short-term relief to a financial crisis. however, they are entirely unsuitable for helping you to settle monthly bills or living expenses.

Secondly, be certain whether you can afford to repay the interest. The interest rates can fluctuate wildly between different states, starting at approximately 237%, depending on the individual lender and the duration of the contract. It is therefore important to calculate the total amount that would be repayable at the end.

Lastly, never use multiple lenders. This can be an illegal and entirely inappropriate practice. You should only secure a single loan against any given pay check, as it is an offense to have more than one advance on a salary payment and it can also leave you with debts that are greater than your monthly salary.

Alternatives to Payday Loans

Instead of using a payday loan, people in need should consider other alternatives. They can, for example, build up an emergency cash fund in their savings account or build credit in order to borrow from mainstream lenders. They can also keep an open credit card for emergency expenses or get a signature loan from a bank or credit union. Another option is to negotiate a payment plan with their lenders or investigate overdraft protection plans for their checking account. Peer-to-peer lending services are also viable options.

In conclusion

Payday loans are very useful if an emergency or an unexpected event arises, but it is the consumers’ duty to understand their nature and use them responsibly. Paying attention to the terms of the loan and the interest rate is critical as this helps you to decide whether it is suitable for you and if you can afford it. Otherwise, you may run the risk of becoming trapped in a debt cycle.

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How to get and use your payday loans wisely

How to get and use your payday loans wisely
How to get and use your payday loans wisely
  • How to get a payday loan

Getting a payday loan is relatively easy. There is very little requirement to qualify. Moreover, the application process has been made as simple as possible by the payday lenders. However, you should be aware of the risks.

  •  Payday loans explained

How to get a payday loan
How to get a payday loan

A payday loan is a short-term loan unsecured loan. That means you have to return the money you have borrowed by the next payday. Normally, that is in about 14 days. For that reason, payday loans are usually loans that invlove small amounts of money. They are meant to cover some bills you are having problems with or unexpected expenses such as a medical bill or even a holiday which you booked on a whim.

  •  The differences between in-store and online payday loans

With payday loans, there are two options – you can get one online or the old- fashioned way with an on-store payday loan. We highly recommend that you use the online option. That is because it has several benefits.

  • It is much faster

You can apply, get approved and receive the loan within 48 hours. Payday loans are the fastest way you can borrow money to cover your expenses and taking one online makes it even faster.

  • It is extremely convenient

You can use the online service 24/7
You can use the online service 24/7

You can use the online service 24/7. There are no restrictions, no closing hours. Whenever it suits you is the right time. Maybe you work long hours or you have  two jobs and it is hard for you to make time to go to the bank and wait in line. That is not a problem anymore. With payday loans online, you can simply fill out the online registration form whenever it is convenient for you. It just takes five minutes!

  • Less interaction

You don’t have to deal with a person who evaluates your behavior and situation. Instead, you will only be judged by the information on your application and that can be beneficial for you in many aspects. For example, in case you don’t have very good communication skills or you just get nervous at interviews, applying for an online payday can save you all that trouble.

  • How to get a payday loan

The procedure itself is very simple. However, there are still some conditions you need to fulfill in order to receive the loan.

  • Find a lender

It is extremely important to read the loan conditions
It is extremely important to read the loan conditions

In order to get the best deal, you need to do some research. Go online and compare several payday loans providers. There are a number of criteria you can use to choose the best one  – having good customer comment, ratings or simply by the design of the website and language used. The most important thing is that you like your payday lender and feel comfortable with the service they provide.

  • Read the fine print

Taking out a loan is a contract. By filling out the form, it means you agree to certain conditions. Normally there is even a box where you are required to tick to indicate that you have agreed. It is extremely important to read the loan conditions. That is the place where you can find all the information such as when you have to pay back and what the consequences are if you don’t. You should be aware of the fact that there are differences in the offers by different lenders. Make sure you have read all the information carefully before you apply. It is important that you know the interest rates and the penalties if any.

  • Double check your lender

You can find out more about your State regulations on payday loan businesses. Some may require special registration. If that is the case, there would be online source where you can check if the company you have chosen is registered and licensed. There is always some additional information on the the Attorney General of the State website.

  • Fill out the application

 fill out the online application on the website
fill out the online application on the website

You can fill out the online application on the website of the provider you have chosen. It is like a simple questionnaire and you just have to fill in basic information about yourself – name, e-mail, etc. That should not take more than 10 minutes. After you have filled out the application, you have to submit it. By this step, the application process would have ended.

  • Pre-conditions

In order for the loan to be legal, there are a couple of conditions every borrower must fulfill.  First, there is an age limit. One should be at least 18 years old to be able to get a payday loan. Under that age, you cannot legally give consent for receiving a loan. Secondly, one should have an active checking account. That is because with online payday loans, the money is directly transferred to your bank account. Additional conditions may include proof of income (although your credit score is irrelevant, some lenders might require you to be employed). You might also be required to provide some form of identification.

  • Credit score

The best thing about online payday loans is that your credit score plays little or no role in you getting a payday loan. That is because the main idea of payday loans is to be quick and affordable. Since the loans are for relatively small amounts of money, there isn’t really a great risk for the lender. Therefore, payday loan lenders are willing to lend money with bad credit score. In addition, if you use the payday loans system wisely, there is a chance for you to actually improve your credit history.

  • How to use payday loans wisely

Payday loans can be extremely useful in times when you find yourself in financial troubles. However, you should be cautious when it comes to borrowing money. There are a couple of things you should know and look for. For example, payday loan debt cycle and predatory lending can be harmful to your future budget.

  • Understand

 make sure you fully understand the whole procedure
make sure you fully understand the whole procedure

The best way to use your payday loan wisely is to make sure you fully understand the whole procedure and all the possible risks. There is plenty of information on various sources. Here is a short list of the most important things you should look out for. If you still have questions, don’t hesitate to seek further information. It is better to be well-informed on money related topics.

  • Stay clear of the debt cycle

A payday loan debt cycle occurs when you are unable to repay the original loan and take out another one to repay it. The same thing can repeat many times and you find yourself trapped. The other option is that you get offered to renew the loan for yet another term in exchange for a small fee. When you don’t have time to deal with the problem and don’t have the money to repay the loan in full, that offer sounds like a good solution. However, try to stay away from the payday loan debt cycle because with time, it only gets harder to get out of it.

  • Predatory lending

That is a term to refer to lenders who use unfair and deceptive practices. That term can mean offering payday loans in States where they are prohibited to setting interest rates over the regulated maximum amount. There is no legal definition for the term ‘predatory lending’ in the United States because it is so broad. That is why some federal authorities try to use the catch–all term in the legal provisions regarding such practices. Apart from that, there are laws against some of the specific practices.

  • Know the true cost of the loan

You may think you just need to repay what you have received and that is that. However, what if you can’t manage to pay on time? In that case, the amount you owe start increasing because of the interest rates. Most payday loans have very high interest rates. It is best if you make a chart and see how rapidly the sum goes up. Simply do the math and that will keep you motivated to repay the payday loan as soon as possible.

  • Pay off on time

Pay off on time
Pay off on time

The wisest thing you can do with a payday loan is to repay it when it is due. That is normally 2 weeks from the date you receive the money. Consider cutting back on some expenses if necessary. Not dining out for a week is a small price to pay to not having problems later. In case you have really have trouble paying back, ask a trusted friend or a family member if they can help you out. Even if you have to repay them, there wouldn’t be a  high interest rate that is doubling and tripling the principal amount speedily.

  • Get your priorities straight

Evaluate what is most important to you carefully. Every month, there are bills to be paid and if you have several loans on top of that, you may need to pick which ones to pay now and which ones to take care of later. Coming up with a smart plan may be able to help you stay out of trouble. Make sure you make the right decisions and put the really important things on top of the list. When it comes to debt, pay back the ones that have the highest interest rates first. That is the right way to approach the situation.

  • Beware of Continuous Payment Authority

Beware of Continuous Payment Authority
Beware of Continuous Payment Authority

Some creditors require authorization to be able to withdraw directly from your bank account money when your payment is due. Sometimes, that may just make the process easier for you. However, if you have other urgent needs to take care of, having money being taken out of your account may be more of a problem. In addition, it is possible that there is no money left in the account and your lender will charge you a penalty fee for that which will be on top of the bank overdraft.

If you want to withdraw your authorization, you have the legal right to do so. There are two approaches – you can either inform your creditor directly or ask your bank to cancel the authorization. Of course, the second way is more secure. However, if you decide to go with the first one, try to do it in a way that you will later on be able to prove your version of the story. That can be done via e-mail or certified letter, for example.

  • Automatic renewals

If you have decided it is suitable to have the money taken out directly from your bank account and you don’t want to cancel your authorization, there is only one thing you have to check. Make sure your lender withdrew the whole amount you owed. What happens is that sometimes, lending companies with authorization simply take a renewable fee and prolong your loan for yet another period. That is a problem because during that time, the amount you owe may keep rising because of the interest rate. So in case you have the money to pay back and you have chosen to do that through payment authorization, make the simple effort and keep of track of the amount that is being withdrawn.

  • Collectors

no need for you to tolerate threatening phone calls
no need for you to tolerate threatening phone calls

Depending on the amount you owe and how long it has been overdue, you may start to receive calls, e-mails and letters either directly from your lender or from professional debt collectors. Although it is normal that you get reminded that you need to pay back eventually, some of the practices used are disturbing and some are even illegal. Make you sure you know your rights and don’t let yourself be bullied. There is no need for you to tolerate threatening phone calls or any other such interactions. Debt collectors don’t have the right to threaten you with legal implication including prison time. You can report such behavior to the authorities. To make a stronger case, you can also record some of those calls or keep those annoying emails. Any illegal loan practices can be reported to the Department of Financial Services or the Federal Trade Commission.