Many consider those who offer payday advance loans to practice predatory lending. Critics claim that these lenders prey on the borrower, who is in a bad financial situation to begin with, by allowing them to borrow an unreasonable amount of money at an inflated interest rate. These claims are often made by assuming the lender is receiving a substantial financial gain by giving out these loans. While on the surface, payday loans may seem like a financial risk to only the borrower, many do not consider the risk the lender takes as well.
Two Sided Risk
Payday advance lenders take a substantial risk when giving out loans to borrowers. Although borrowers are required to provide a personal check for collateral, there is no guarantee that these lenders will ever see their money again. After the borrower obtains their money, there is no way to prevent them from closing their bank account or ordering a stop on their check. The borrower may also write a fraudulent check to the lender to prevent them from getting their money. The lender has no control over their customer’s bank account, so they can not prevent these types of losses from occurring. Most lenders report a default rate of 10 to 20 percent on their loans. Defaults are very costly to the lenders and lose them a quarter of their annual revenue.
Need to Know Interest Rates
Interest rates are a hot topic among payday loans. Many people look at the interest rates the loans carry and are alarmed at the high numbers in front of them. Most do not consider that what they are seeing is an annual percentage rate, or an APR. The APR interest rate is used for long term credit situations and payday loans are designed to be short term. The APR is designed to show the consumer what the interest rate would be on an annual basis, or over a year’s time. Although, payday loans are not designed to be extended over a year. These loans are intended to be paid within a month, at most. So, the rate reflected does not necessarily reflect the rate the borrower will actually pay.
Make sure you choose the right lender
Not all payday lenders have the borrower’s best interest in mind. When searching for a reputable lender, borrowers need to consider many factors before making a commitment. A responsible lender would not push or allow a customer to borrow more than they can reasonably pay back within the allocated time frame. Whether the decision is factored upon the customer’s income or repayment length, a responsible company never deliberately deceives its borrowers. The rate of transparency is another thing to look for when considering a company. Is this company upfront about their interest rates and repayment expectations? If so, the company is likely an honest loan company. The lender must also be compliant with all state and federal regulations to be a legitimate business.
It’s up to you now!
Finally, it’s up to the borrower to make an informed decision. When taken at face-value, payday loan practices appear to be predatory. But, once the high potential of loss to the lender and the reality of the repayment terms are considered, the lending does not seem so predatory or misleading. Borrowers should always be careful and well informed when selecting a lender as to not be misled into a compromising financial situation.
Author Bio: Joe McGowan is a budgeting and personal finance expert and blogger. Joe writes about personal finance and budgeting on a number of other money saving sites, and is passionate about responsible lending and helping people save money.