Payday loans were created for people who need money quickly. Typically, their reasoning tells them, they are unable to wait for their next pay cheque. A payday loan type of company allows this person to get fast, easy money, to cover off these situations, that they have identified as an emergency.
Some other names the payday loans can be called are payday advance, salary loan, payroll loan, salary loan, payroll loan, small dollar loan, short term and cash advance loan.
The definition of a payday advance is “a small short term unsecured loan, regardless of whether repayment of loans is linked to a borrower’s payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having a previous payroll and employment records. Legislation regarding payroll loans varies widely between different countries, and in federal systems, between different provinces and states. [definition courtesy of Wikipedia]
This industry started in the mid 1990’s and has become one of the primary sources of lent money in Canada. More and more Canadians are using payday lenders.
Payday advance companies rival the number of locations enjoyed by the likes of McDonalds, or the big financial institutions. And they continue to grow. They have expanded exponentially by offering services online.
Sample List of Direct Lenders
Some of the companies that are listed as payday lenders are:
Cashadvance.com MoneyKey MyPaydayLoan CashNetUSA Blue Trust Loans Cash Central MoneyLion Net Credit Capital Cash Upstart MaxLend FastLoans Check City Loan By Phone LoanSolo 1 Hour Loans National Payday PaydayLoan Today LendUp LendingClub TMG Title Loans Wizzcash Check Into Cash
This is just a small example, there are many more.
Who Accesses Payday Loans?
The person who accesses a Payday Loan organization will have convinced themselves that the need for the borrowed money is greater than delaying the expenditure until they are able to pay for it out of their regular income. When they discuss the use of these companies, they are justifying this behaviour to both the listener and themselves. Most of their “reasons” are better identified as excuses. Some of them are as follows:
- maxed out credit card
- bank won’t give me a loan
- using bank overdraft
- car repair bills
All in all, they typically do not have enough money to cover their monthly expenses. The chart below outlines some of these reasons:
Another contributing factor is that many people do not understand what they are getting themselves into when they take out a payday loan.
“Fewer than half (43%) understood that a payday loan is more expensive than available alternatives. This suggests that many do not have sufficient knowledge to consistently make the borrowing decisions that best serve their financial well-being.”
How to Get a Payday Loan
One of the disguised problems of payroll loans, is the ease at which one is able to qualify.
Here are the basic steps needed to get a payday loan:
You can access a payday lender at one of their many storefronts, or you can apply online or by phone.
The application form consists of gathering your contact information and possibly some references.
Next, you write a cheque or pledge to pay the amount borrowed by a predetermined date.
Now the lender is able to add a finance charge or fee onto the total amount owed.
So, let’s say you are borrowing $100. The lender will add a charge of $15. You now owe him $115
You receive your $100 via bank deposit or he will give you a cheque.
When the predetermined date arrives, the lender will cash your cheque for $115.
The borrower has received $100 and has likely spent it on the unexpected expense that lead him to the payday lender, and he now is about to have a cheque of $115 cashed.
In most cases the borrower is not able to cover this cheque.
The payday lender can offer him a “roll- over” feature.
This is where the lender will “roll” the first loan over to another term. And, you guessed it, he will add another fee, and this fee will be higher than the last time.
This is how the cycle of debt begins. This cycle is very difficult to exit.
The problem begins with the ease of which someone can get into a payday loan. Their ability to be flexible makes them more appealing than banks.
They have more storefronts than banks, and they offer longer hours, some are open 24 hours a day.
The payday lender will rarely check a persons credit rating.
And, the entire process takes very little time, usually completed within a half hour.
The ease at which the borrower can become involved in a payday loan is a key part of the problem
The Cost of Payday Loan Servicing
Getting the loan is relatively easy. Servicing the loan is another issue.
Interest will be charged on your loan from the day your loan starts, and continues to be charged until the loan and all the fees are paid back, in full.
In Canada, payday lenders are not allowed to charge more than 60% annual
interest on a loan. The fees and charges the lender attaches to the loan are considered a part of the interest. There are so many various fees attached, that it does not take long to reach 60% annual interest.
Some of the fees charged are: administration, processing, convenience, verification, collection, brokers’ fee, early repayment fee, set up fee, cheques cashing fee, NSF, roll over, and liens. And I am sure, I have missed some!. The point is that the payday lender will “fee” you until you have no money left.
Below is a comparison of the cost of a payday loan to a credit card advance, an overdraft on a bank account, and borrowing a line of credit, provided by The Community Credit Union.
A person signs a contract saying they have read stating that they understand all of the above, so it is difficult for a borrower to come back and dispute with the lender.
Cycle of Debt
Because of the roll over term and all the fees listed above, the borrower becomes unable to pay off the debt. In effect, if they do not pay off the full amount in the beginning, the debt will grow at an astounding rate. Most times the borrower is dumbfounded and fails to understand what has happened. The results are devastating.
Lack of understanding the actual cost of borrowing, makes the initial payday loan seem like a walk in the park. Until the first payment is due…..
Before he know it, the borrower has become locked into a never ending cycle. This financial burden, can end up being worse than the initial reason for borrowing.
There is no purpose in berating the person who has been caught in the payday cycle of debt. There are ways to get out of the cycle, which will be covered in subsequent post.
It important to gain knowledge of an transaction before you sign a contract. I have to believe that if they knew how much it was going to cost them, they would not have signed. Perhaps a discussion with a trusted friend, before borrowing, would make them realize that there is nothing in the present moment that is worth the cost of a payday loan. In my opinion, a payday loan is not worth the cost.
I Do NOT Recommend using Payday Loans
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