Common Pitfalls with Payday Loans

Payday loan red rubber stampSimply speaking, a “payday loan” is a loan that is made with a paid-in-full due date that corresponds with the borrower’s next paycheck or scheduled benefit compensation. These short term loans generally carry a very high interest rate that can run anywhere from 351% upwards to 500% (or higher)! The term may also apply to a loan with a slightly longer payment due date (possibly six months), but it will still be created with a due date that falls on the borrower’s pay date. This type of loan is also called an “installment loan” and may incur an origination fee along with a high interest rate. In general, those who are seeking a payday loan will usually find them either a payday lender’s storefront operation or online.

Potential risks associated with a payday loan

Although a payday loan can be sometimes be a fortuitous solution to an emergency cash need that may occur in-between paydays, they can also entail serious risks to the borrower. Here are a few examples.

Exceptionally high interest rates

As mentioned earlier, a payday loan can carry a three-digit interest rate that can run anywhere up to 500% or more. This is in stark contrast to a typical credit card interest rate, which will generally average around 13% – 18%. However, you need to keep in mind that some states have placed a limit on the amount of interest that may be charged. Therefore, you will want to take a look at whether or not a limit applies to your particular state. You can obtain this information from your state’s consumer protection agency.

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High fees in addition to interest rates

In addition to the exceptionally high interest, a payday loan may also have a high fee attached. A lender may designate this as a “processing fee”, for example. You need to be aware that a high additional fee may be the lender’s way of skirting around a state’s maximum loan interest rate. Here, you will want to make sure that any and all fees are clearly defined in the initial loan paperwork since you will be required to pay the full fee, even if you pay off the loan prior to its due date.

Dishonest lenders and those outside your state’s jurisdiction

Many dishonest lenders have been known to avoid adhering to their state’s licensing requirements when it comes to offering loans. You’ll find these lenders operating online and they may have their operations located in a foreign country. In some cases, their mailing address is actually located at a U.S. mailbox rental store in order to give the appearance of being a U.S. company.

Consider the risks involved with providing your sensitive personal information to a company that is hiding the fact that it is working overseas. In addition, the protection that you would normally receive from your state’s lending laws would not apply to a lender that doesn’t operate in the U.S. This caveat may also apply to a lender which is owned by a Native American Tribe which isn’t subject to state lending laws.

In order to avoid these types of problems with a payday lender, you should:

  • Thoroughly research the lender before doing business with them
  • Look for that lender’s corporate address. If it isn’t displayed in the loan documents and on the lender’s website then you shouldn’t be dealing with them
  • Never deal with a lender who is unlicensed. Always verify the lender’s license prior to taking out a loan

These are just a few of the problems that can arise when applying for a payday loan. For further information you can contact your state’s consumer protection office or take the time to perform additional online research. By doing so, you may avoid a potentially serious lending error that can take an extensive period of time to resolve.

Posted on November 13, 2017 by in Personal Loans

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