For most people the paycheck on payday simply vanishes into thin air, as they have to repay all their borrowings during the month and the long term loans. The very thought of being penniless during the month pushes them to the welcoming arms of lenders providing payday loans. These lenders advertise at various check cashing outlets, in pawnshops, within the classified ads and also online. The internet has become a new haven for publicity of payday loans with check-based lenders promoting their services through pop-up ads, in junk e-mail and on Web sites. However, consumers must realize that such "cash until payday" services might sound helpful but they can land themselves into a quagmire of repeated borrowing at exorbitantly high costs.These small, short-term, high-rate payday loans are often labeled different names such as payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans. The storefront lender just needs a check from the borrower for the amount of the loan plus the fee. The borrower gets the amount of the check, minus the fee. On the next payday, the borrower has the following options: allow the check to be cashed, redeem it by paying cash to recover the loan plus a fee or roll it over by paying the fee to extend the payday loans for two or more weeks. In the case of taking an internet loan, the loan is applied for online and the funds are delivered and collected through electronic fund transfers between the lender and the borrower's bank account. Electronic access to the borrower's bank account is required for this loan.
To qualify for payday loans, the bank account of the borrower must be in relatively good standing and there must be a reliable source of income or benefits. However, no conventional credit checks are performed. Borrowers should be careful of loan flipping, whereby gullible borrowers are encouraged by lenders to write checks without funds for deposits and then the checks are used to coerce them to extend the loan.
The average APR for payday loans works out to about 300% as the finance charges can range from $15 to $30 per $100 borrowed. Per the Truth in Lending Act, the consumer must receive in writing the cost of the payday loans, the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis).
In the case of internet payday lending, consumers are encouraged to apply and receive loan funds deposited overnight in their bank accounts by filling out online applications and/or faxing applications and support documents. Besides high credit costs, the following challenges are faced by consumers: it may be difficult to locate lenders as some hide behind anonymous domain registrations or may be located outside the U.S; there nay be problems in communicating with Web lenders regarding any questions that borrowers might like to clarify or to resolve disputes that may arise. Moreover, most internet payday lenders locate themselves in states with lax regulations so that they can bypass state usury laws and consumer protections. This way, they can make payday loans without complying with the licensing requirements or other protections of the borrower's home state. Moreover, the borrower can be exposed to privacy and security risks while filling out applications for payday loans if the lender does not abide by strict privacy policies or the Web site is not secure.
The Better Business Bureau advises consumers to consider other possibilities such as a small loan from your credit union or a small loan company, an advance on pay from your employer or a loan from a family member or friend. Ask for more time to pay your bills and the charges for that service either as a late charge, an additional finance charge or a higher interest rate. Your local consumer credit counseling service can help you in working out a debt repayment plan with creditors or developing a budget.
You must check the fees associated with payday loans before going in for them.
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