Payday loans are an extraordinarily popular form of borrowing, but they don’t have the best reputation. Why is this? For the most part, cash advances get a bad rap because of the unscrupulous tactics of a handful of lenders that give the rest of the industry a bad name. In addition, some buyers dive into short-term borrowing without fully understanding what they’re getting into, which leaves some borrowers with a bad taste in their mouths. So are cash advances really all that bad? In this post, we’ll answer that question and try to provide some insight into why payday loans have such a negative stigma.
- Notorious lenders. Sadly, the unethical practices of just a few lenders can get generalized to an entire industry, which is in part what has happened with payday loans. Before the government regulation that we have today, some short-term lenders charged usurious interest rates and were not upfront about their terms. They took advantage of their borrowers, and, in doing so, earned the entire industry a degree of notoriety for being less than upstanding.
- Outrageous interest rates. The average borrower will pay about $15 for every $100 borrowed. This translates into a 400% APR, which means these loans are, without question, costly cash. However, if they are used infrequently and with discretion, payday loans can be a viable solution to short-term cash flow problems.
- Uninformed borrowers. The federal Truth in Lending Act mandates that lenders disclose the terms and rates of the services in the consumer loan agreement. The APR must be disclosed in this agreement in bold. All of the information that a borrower needs to know is contained in this agreement, but problems arise because few borrowers actually read the document. As a result, interest rates and terms catch the borrower by surprise. To avoid this, read your loan agreement thoroughly and ask your lender any questions you have before you sign.
- Misuse of the loans. The real danger comes when borrowers depend on them chronically. Borrowers who continually roll the loans over for more time eventually bury themselves in finance charges, making it virtually impossible to pay the original loan off. Rather than rolling the loan over when it is due, try to do everything you can to pay it off. Though the additional time may be convenient, it will cost you dearly in finance charges.