Installment loans are thought to be a lot safer than payday loans. Is this really true or are they just as risky for the borrowers?
Payday loans are probably the most popular type of short-term loans out there. Even though there are many different opinions about them, there is always one certain thing – high risk. This fact by itself leads to the growth of another type of loan – installment loans that have the reputation of being a much safer choice. However, lately, different researches showed that this may not be the case or at least not fully the case. It turns out that there are some secrets in installment loans that may pretty much change the way that borrowers look at them. Some lending companies claim that installment loans are better than payday loans due to the fact that they don’t include the final payment that can really make the borrower go over the edge, making him end up with even more debt. But that alone does not necessarily make them a safe service. According to Lauren Saunders who is a an attorney, working at the National Consumer Law Center, “There are installment loans that have very deceitful add-on fees, extravagant rates, and deceptive products, and tricks such as loan flipping, that make them just as, if not even more dangerous than payday loans.”
Installment loans, much like payday loans, don’t start off looking like they involve a big amount of money. A lot of people who are financially vulnerable are easily attracted by what these short-term loans have to offer. Since information is essential when making any financial decision, we’ll uncover 5 secrets about installment loans to help you make better choices.
They are not a one-time solution
Installment loans have the reputation of being an easy, one-time fix to a financial difficulty. Reality is, much like payday loans, installment loans can be renewed into new loans over and over again. And lending companies providing installment loans tend to make their clients do that. A research showed that about 76% of the company’s loan volume consists of renewals of existing loans.
The annual percentage rate can go as high as 500%
A customer participating in an installment loans customer research had an APR of 110% listed on his contract. Even though this sounds bad, there are much worse cases out there. By renewing their loans over and over again, borrowers can end up paying incredibly big amounts in interest rate. The repayments are structured in a way that in the early stages you pay more in interest. Meaning that refinancers keep on paying interest but without putting much of a dent in the principal which doesn’t really help with getting out of debt.
Recently, federal regulators have broken down on some credit card companies which sell add-on products such as ‘credit protection’ plans. That being said, installment loans lending companies are still aggressively trying to sell these services to their clients.
Installment loans are growing
As an indirect result of the negative focus that the media puts on payday loans lending, more and more borrowers are turning to installment loans in times of financial difficulties.
Installment loans lenders use aggressive techniques to collect their money
Some lending companies are really aggressive when it comes to collecting their money. In some cases, they may even start calling you before your due date. If the repeated calls don’t do the trick, they may start calling you at your workplace or even start harassing your friends and family. If you refuse to answer these phone calls, installment loans collectors may show up at your home or your workplace to continue their threats.
All types of loans have their benefits and downsides. It is up to you to decide which option suits you the most, but one thing is for sure – the more information you have, the better you are able to make the right financial decisions.
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.
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?
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?
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.
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?
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?
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.
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.
Payday loansare 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
When taking out payday loans online, you should keep in mind that the Consumer Federation of America (CFA) has long advised consumers to exercise extremecaution. 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
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
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 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
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.
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.
This global recession has lead to a great change in the way individuals manage modern day finance. The emergence of the ‘Online Payday Loan’, is one of them. Sure , they’ve always been there in the background. But now more and more people are using them. Utilised in the right fashion they can work well.
Small amounts borrowed online a little before pay day can be paid back without any problem. And of course we all have emergencies from time to time like a car breakdown or a late bill! But sadly many more people on low incomes are being sucked into a trap of multiple instant payday loans and high interest.
WHAT IS A PAYDAY LOAN?
First of all there are many terms for such a loan from ‘Cash Advance Loans’ to ‘Deferred Deposit Loans’, ‘Check Advance Loans’ to ’30 Day Loans’. They are all the same and work in exactly the same way. The applicant applies for amounts of cash ranging from $100 to £1000 and beyond in some cases. Generally you borrow the money for a set period mainly 30 days or a calendar month.
On your payday the lender, who has your bank card details will take the money back from your account plus interest and any other fees. Normally $20 for every $100 borrowed. If the borrower has problems paying this back on payday then in some cases the loan can be rolled over. In this case there’s a further charge and the consumer can end up paying a lot more than the original sum they borrowed. This is very expensive on the face of things as you’re literally buying money. You probably wouldn’t entertain a credit card with such a high APR – more than 400 per cent in some cases. The truth is you’re paying for the convenience of someone solving a monetary problem for you.
Most companies will look at your credit report but there are others who don’t carry out a credit check. While most reputable lenders are just that! There are some who flout financial regulations and create extra charges just for fun. The fact is if they don’t credit check you then don’t touch them unless you want to take the risk on their reputation!
WHERE CAN I FIND PAYDAY LOANS?
There are shops in the mall who provide such a service subject to you supplying employment and personal details. But these days most payday loan companies can be found online. In most cases for first time customers they will only lend up to a certain amount. If this initial loan is paid back on time then you’ll generally be allowed to borrow more. Some will even give you a loan to be repaid back over the course of three, six or 12 months. Remember the interest rates will be high so compare several of them before taking the plunge. Payday loans online might come with an extra fee for getting the money put into your account quickly! Otherwise it might take a day or two depending on which bank you use. Make sure you shop around and go with the top names whenever possible.
WHAT ARE THE ADVANTAGES?
You can quickly find cash when you need it in a hurry for everyday emergencies.
Used sporadically and in small amounts payday loans can be of huge benefit.
They can cover shortfalls until your next payday.
You can get finances into your account from your own home.
WHAT ARE THE DISADVANTAGES?
This quick cash loan comes with a high rate of interest.
Rolling over a loan can quickly get you into financial trouble.
There can be various admin charges and fees.
Not all companies are what they say they are.
THINGS TO THINK ABOUT?
Pay day loans are not the answer to long term problems – they are only designed to help you in the short term. Make sure you can pay it back on your designated date. Know what you’re getting into before applying and shop around for the best deals. More importantly make sure you fully understand their terms before signing up. Check out the Federal Trade Commission’s website for more information! Legitimate lenders will always show their terms clearly and all fees will be clearly apparent. It’s always a good thing to look at the possibility of borrowing from family or friends first anyway.
If you must use a loan until your next payday then make absolutely sure you remain in full control in terms of being able to pay it back. All good companies will have transparent contact details so it’s possible to speak to a human being at the other end when you need to!