What are Payday Loans?
Do You Really Need a Payday Loan? A Guide to Borrowing Wisely
Payday loans is a term that everyone is familiar with, to at least a certain extent. Regardless of which walk of life one belongs to, they can find something about payday loans in either a newspaper or a news-related website. Many stores offering instant payday loans can be found in our cities. And while we have an idea about these loans but we don’t know how they came into existence? What caused the payday loan industry to become such a lucrative business that it is today?
A Brief History
Experts say that the payday-lending industry originated in a shadow form, in the US in the early 1980s. The emergence of payday loans is attributed to the Depository Institutions Deregulation and Monetary Control Act in 1980, which led to deregulation of interest rates. The elimination of interest rates limits as a consequence of this act facilitated the payday lenders’ growth.
It wasn’t that before the 80s there weren’t any loan sharks present in the society. In fact, different forms of lenders that charged very high-interest rates have been around in the US ever since the Great Depression. The US has always been thought of as one of the founding homes of illegal loan sharking. It was much prevalent in many states in the late 1800s where workers who could not gain an access to traditional bank accounts chose this method of solving their financial problems. However, it wasn’t without its controversies. These lenders were aware of the fact that they were the last resort for most consumers. Therefore, being unlicensed, illegal, and yet condoned by the law, they continued to levy high-interest rates.
What are payday loans and how do they work?
A payday loan is a short-term loan and instant loan, often for small amounts like $500 or less, which is generally due on one’s next payday. The cost of the loan may range from $10 to $30 for every $100 borrowed. The rates of interest are invariably high for all payday loans. For instance, a two-week payday loan with a $15 fee per $100 borrowed equates to an annual percentage rate (APR) of almost 400 percent. The total principal and the loan fee is required to be paid back at the end of the loan term. Most borrowers are unable to do so and that causes the loan to roll over into a new loan with a new loan fee. This is why the Consumer Financial Protection Bureau has been attempting to discourage people from taking out a payday loan.
Consumer Financial Protection Bureau’s Take on Payday Loans
“The Consumer Financial Protection Bureau is working to end payday debt traps. Today, we’re announcing a proposed rule that would require lenders to determine whether borrowers can afford to pay back their loans. The proposed rule would also cut off repeated debit attempts that rack up fees and make it harder for consumers to get out of debt. These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans.”
The aforementioned excerpt from the CFPB’s official website tells us everything about their take on payday loans. The practice had come under fire after the economic crisis of 2008 and authorities had begun to imply that many much-needed regulations will be formed in the context of payday loans.
What is the Alternative?
Since the chances of getting stuck in a debt trap are very high in case of payday loans, we need to look for an alternative. The low-income Americans who don’t have enough credit to use the traditional banking system for loans depend on the dubious payday loans. But with Advance Financials Flex Loans, they don’t need to so anymore. A Flex Loan is an open-ended line of credit which allows you to withdraw any amount within your credit limit and pay the interest on only that amount. The concept of a loan rolling over doesn’t exist within Advance Financials transparent terms of business. A Flex Loan is a noteworthy alternative for a payday loan because it is much cheaper and hassle-free than the latter.