Three Things to Be Wary of With Payday Loans and Cash Advances
In today’s gruesome economic climate, money woes plague nearly every individual’s consciousness in some way or another. While not every individual is struggling to make ends meet, with an economic atmosphere as turbulent as the one we are living in now, money is a concern regardless. As more and more people struggle to make payments, pay rent, and pay off debt, more and more people are seeking quick fix money solutions. Payday loans offer quick relief for short-term payments that need to be made. Also known as a paycheck advance, a payday loan is a small short-term loan that is given to a borrower to cover expenses until his or her next paycheck. While these loans can no doubt be useful (if not necessary) at certain times in individuals’ lives, they also come with a certain amount of risk.
Before pursuing a payday loan for yourself you should be sure to educate yourself on how they work and what precautions you might want to explore. Legislation regarding payday loans varies depending on the state that you seek one from in the United States. For this reason, payday loans can be somewhat tricky to understand. However, there are several aspects of short-term loans that borrowers should be educated on and potentially wary of.
1. Exploitation of Financial Suffering
One major criticism of payday loans is that they profit from the hardship of the less fortunate. Believed to target the young and the poor, payday lenders are commonly positioned near military bases and in low-income communities. The ethical standing of these lenders and the concept of a payday loan in general comes into question. Is it morally acceptable to try to earn profit from an individual going to you because they do not have enough money? The concept it’s self seems somewhat backwards. Furthermore, critics of payday loans and lenders argue that borrowers may not understand their true effect the high interest rates and fees associated with payday loans. Borrowers become trapped in a “debt-cycle” because they have to repeatedly renew the loan every two weeks, paying extra fees and higher interest.
2. Damaging Low-Income Communities
Of course, average-income individuals seek payday lending as well as low-income individuals. However, it is the lower income individuals that suffer more severely from these types of lending practices. Low-income individuals have few assets and are commonly unable to secure a normal lower interest rate form of credit. Payday lenders require higher interest rates than traditional banks because they are traditionally more risky for the lenders. These increased interest rates discourage savings or asset accumulation by the borrowers. Payday loans can deplete the assets of low income communities and can bring down the property value of homes positioned near one of the physical institutions.
3. Tricky Pricing Structure
Payday lenders argue that their use of significantly higher interest rates is essential for them to gain any sort of a profit. While the concept of making a profit off of this practice at all has come into question, this argument may be flawed for other reasons as well. Payday loan officials claim that the processing cost of a payday loan does not differ much from other loans, such as home mortgages. However, critics of payday loans counter that payday lenders’ processing costs are significantly lower than the costs for mortgages and other more traditional loans. While large-loan lenders take a detailed analysis of a borrower’s credit history and their overall likelihood to pay back the loan, payday lenders only take into account an individual’s recent paychecks. By not looking fully into a borrower’s ability to actually pay back a loan, payday loaners create a difficult system to succeed within.
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