Fast Cash and Payday Loans
Introduction
Hamlet was written by William Shakespeare well over 400 years ago. One of the most famous lines ever written comes from this play: “Neither a borrowing nor a lender be.” However, in the modern world, it is standard practise for borrowers to borrow money from lenders and for lenders to lend money to borrowers. According to some estimates, up to 80 percent of customers in the United States have an outstanding balance on at least one sort of debt. This could apply to traditional long-term loans such as mortgages, auto loans, or school loans, or it could refer to revolving credit such as credit cards. There’s also the possibility of cash advance loans.
When a borrower is in need of cash in a hurry, payday loans are promoted to them as an easy and temporary solution to the problem. In the 1980s, payday lending businesses operating out of physical locations around the country began to proliferate and quickly became an industry standard. In the United States, there were 14,348 different stores that offered payday loans in 2017. When compared to the amount of Starbucks locations, this was almost the same number, although it was somewhat higher than the 14,027 McDonald’s stores that existed in that same year. The convenience of applying for a payday loan online became available on the internet in the 1990s, which led to rapid expansion of the sector.
What Is a Payday Loan, Exactly?
Payday loans are a form of alternative financial service that enable borrowers to obtain quick cash to deal with unexpected financial challenges or to assist them in meeting their financial obligations between paychecks. “Payday loans” is the appropriate name for these unsecured loans with a short repayment period. The term “payday loans” comes from the fact that the duration of a loan typically matches the schedule of the borrower’s paydays. After a loan is approved, the borrower will typically have to make what is known as a “balloon payment,” which is the full amount of the loan in addition to any fees.
The loans typically have a maximum value of $500 and must be repaid between two and four weeks after the borrower has received the funds. The borrower’s pay schedule or how frequently income is received can determine the length of the loan; hence, the length of the loan could be for one week, two weeks, or one month. Consumers who were paid at more frequent intervals throughout the month had the capacity to take out a greater number of loans over the course of a given time period than consumers who were paid monthly.
Payday loans taken out in a physical storefront have the same fundamental structure as those taken out online, with the distinction that all contact is handled digitally. This comprises the application for the loan, the authorization for the lender to electronically make a withdrawal from the checking account of the borrower, and the direct deposit of the money borrowed into the checking account of the borrower.
Securing Payday Loans
Payday loans are not like regular loans in the sense that applicants do not need to provide collateral or have a certain credit score in order to qualify. In most cases, credit reports and credit scores are not included in the process of obtaining a loan. Borrowers need to fulfil a number of prerequisites before they can qualify for a payday loan. The debtor is required to have
- A bank (or credit union) account, a prepaid card account,
- proof or verification of income from a job or any other source,
- a valid form of identification,
- and proof of age—you must be at least 18 years old.
Alternative Methods of Payment
Payday loans typically come with several different repayment alternatives to choose from. A postdated check is required from the borrowers in one of the available options. In this scenario, a check is made out for the total amount borrowed in addition to any fees and interest that are associated with the loan. The payday lender makes an agreement with the borrower to hold the borrower’s check until the due date of the loan, which is typically the borrower’s next payday. The lender has the right to cash the check if the borrower does not come back to the location where the loan was taken out to negotiate alternative payment arrangements or to renew the loan. If the borrower’s checking account does not have enough money in it to cover the check, the check will bounce, and the borrower will be charged a fee for the overdraft that occurred on their account as a result of the overdraft. However, the loan will not be repaid. Because of the borrower’s failure to make payments, the lender may decide to try to recover the debt by filing a lawsuit against the borrower.
Another alternative for making payments requires the borrower to provide written permission for the lender to access any bank or credit union accounts the borrower may have. A direct deposit of the loan’s amount is made into the account, and the borrower grants the lender the right to make an electronic deduction for the total amount due on the due date from the account. Only the additional fees are taken out of the borrower’s account if the borrower makes arrangements to renew the loan. This choice gives the borrower the ability to prioritise paying the loan over their other obligations and costs. Payday lenders may, in certain circumstances, be able to offer longer-term payday instalment loans and may request authorization to electronically withdraw multiple payments from the bank account of a borrower. These payments are typically due on the borrower’s pay dates.
A payday loan can also be obtained by using a prepaid debit card as an alternative payment method. Some consumers have financial needs that are met by reloadable prepaid cards, and households that do not have bank accounts are more likely to use these cards. This is especially true of households with lower incomes, lower levels of education, younger members, and some households comprised of members of minority groups. Unbanked borrowers, as the name suggests, are those who do not have any type of account at a conventional bank or credit union. Customers who fall into this category have a checking or savings account but also make use of non-traditional financial services like payday loans. When a borrower pays for a loan with a prepaid debit card, the amount of the loan is transferred straight onto the card, and the borrower grants the lender the right to electronically deduct the whole amount from their prepaid card when the repayment is due.
Performing the Number Crunching
The high cost of getting a payday loan presents a concern. Borrowers may shell out as much as $9 billion in fees for payday loans each year as a collective group. A payday loan with a term of two weeks will cost you an average of $55 in fees, and a loan of $375 will result in a total cost of $520 in costs due to the need for additional borrowing. However, the federal Truth in Lending Act provides borrowers with knowledge and statistics that are extremely helpful regarding the cost of borrowing money. Before a borrower signs a loan agreement for a payday loan, the lender is required by law to disclose all of the fees associated with that transaction.
Payday loans have a fee-based structure that is very different from the structure of traditional loans, and the overall cost of payday loans is significantly higher than the cost of traditional loans. Lenders are required to not only present the cost in the form of a finance charge (fee), but also in the form of an annual percentage rate (APR). Consumers can use this information to compare the cost of a payday loan to the cost of other types of borrowing, such as credit cards. When determining the APR, the interest and fees associated with the amount borrowed are compared to what those associated with the amount would be for a period of one year (see “Calculating the APR of a Payday Loan”).
Who Takes Advantage of Payday Loans?
An estimated twelve million people in the United States take out payday loans each year. The use of payday loans is promoted as a useful solution for unforeseen or urgent financial obligations. However, seven out of ten borrowers put the money from their loans toward paying for essential costs like their rent and their utilities. This should not come as a surprise given that up to 58 percent of borrowers struggle to satisfy the most fundamental of their monthly obligations.
Payday lenders often choose to set up shop in neighborhoods that are densely populated with members of the demographic groups that they target for marketing purposes. Payday stores, for instance, are more likely to be located in areas with poverty rates that are significantly higher than the average, lower income levels, a greater number of single parents, and certain minority groups. Additionally, the typical borrower for a payday loan has a low level of educational attainment.
Many people have a requirement that is met by payday loans, particularly consumers who are unable to obtain conventional loans because they either do not have credit or have credit scores that are inadequate. It is estimated that 6.5 percent (8.4 million) of households in the United States did not have a bank account in 2017. Additionally, 18.7 percent (24.2 million) of households were underbanked in 2017; this means that they had a bank account but used alternative financial services such as payday loans. Because of their poor credit (no credit history or a low credit score), these customers frequently find that they are unable to obtain traditional loans; hence, they seek out alternative lenders.
State Regulation
Traditionally, payday lending has been governed by the laws of separate states; hence, each state possesses its own unique set of restrictions. When there are so many variables to consider, trying to comprehend payday financing can seem very difficult. There are already interest rate limitations in place in seventeen states and the District of Columbia, which have the effect of driving payday lenders out of business because of the inability to make a profit from their operations. The payday loan industry is legal in the remaining 33 states. These states have either chosen not to regulate the interest rates on payday loans or have decided to exempt payday loans from the usury laws that govern loans of this nature.
The regulations enacted by states address issues such as repeat borrowing, cooling-off periods (waiting periods) between loans, loan limits, loan lengths, renewal restrictions, and effective APR caps. These regulations determine the practices that are followed within each state. The fact that some states mandate the use of multiple installment payments for payday loans rather than the more common one large balloon payment further complicates the situation.
Payday loans are organized and priced extremely differently because each state has its own unique combination of legislation, so each state has its own unique set of regulations. There is a significant disparity in the interest rates that are charged throughout the states that make payday loans legal. Lenders within a state generally impose costs that are comparable to one another and that are either at or very close to the legal maximum (see “Sample of U.S. Payday Loan Interest Rates Calculated for a Typical Payday Loan”).
Federal Regulation
Customers serving in the armed forces frequently take out cash advance loans. As an illustration, in the year 2017, approximately 44 percent of military members obtained a payday loan. When compared to the 7 percent of all customers that use these loans, this percentage is significantly higher. In 2006, the United States Congress passed the Military Lending Act, which was later amended the following year to include more protections against excessively high interest rates and taxes. This federal law makes it illegal for payday lenders to charge active duty members of the armed forces an interest rate that is higher than 36 percent on a variety of loan products, including payday loans.
Under the provisions of the Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) was founded in 2011. (also called the Dodd-Frank Act). The Consumer Finance Protection Bureau (CFPB) was founded with the goals of enhancing the federal government’s ability to enforce consumer financial laws and increasing consumer protection regulations, especially those pertaining to payday loans. The Consumer Financial Protection Bureau is tasked with conceiving of and making suggestions for brand new federal regulations.
It is continuing to investigate the evidence and evaluate the activities of payday lenders. This includes making a concerted effort to get public feedback as new concerns come to light. Consumer access to credit and consumer protections from harm linked with lenders’ payment practises are both factors that should be taken into consideration. Kathy Kraninger, the Director of the Consumer Financial Protection Bureau (CFPB), made the following statement in February 2019: “…I look forward to working with fellow state and federal regulators to enforce the law against bad actors and encourage robust market competition in order to improve access, quality, and cost of credit for consumers.”
Conclusion
Cash can typically be obtained through the use of a payday loan either instantly or within the span of 24 hours following the submission of the loan application. They are easy to use, and for some customers, they are the only source of loan options that are available. The prevalence of its use suggests that a significant number of consumers rely substantially on payday loans. When looking into payday loans, one finds that there is grounds for concern due to the structure, the high costs, the high rates of renewal and loan sequences, as well as the cycle of debt. As a direct result of this, a number of states do not allow payday loans, while others tightly regulate the industry. Borrowers need to be aware of what they are getting into when they take out a payday loan in order to avoid taking on more debt than they are able to pay back, as is the case with all other forms of credit. Without the power of knowledge, borrowing money is a costly endeavor.