Have you been thinking about securing a payday loan in these very trying times? Are you wondering why a lot of people get easily stuck in the so-called “payday loan debt trap”?
Well, good thing you’re in the right place. In this guide, we’ll be talking about what a payday loan really is, what are the risks involved, if the government can extend assistance on payday loans, and a whole lot more!
Payday Loan and the Payday Loan Debt Trap
As the term obviously implies, the payday loan is a short-term cash assistance anchored on the borrower’s succeeding paycheck. It is an unsecured loan solution which is often considered as a faster and easier alternative in covering various financial emergencies.
These cash advance loans are linked to a portion of your upcoming paycheck but are encrypted with high interests at the same time. The term runs typically within two weeks, hence, the use of the phrase short-term as part of its primary definition. It is also referred to as cash advances since its due for payment is at close-shave with your next payday.
The amount of payday loans range from $50 to $1,000 and are offered by small scale credit entities through physical or online processing. Compared to bigger and more complex loans, these cash advances have basically simple requirements.
The borrower must only secure a valid identification, at least 18 years of age, a proof of income which is mostly in the form of pay stubs, and an active checking account. The mortgage is accessible to borrowers with poor credit scores because it doesn’t necessarily require a credit check which is a common rule on bigger loans.
Provided that the borrower gets to meet all the aforementioned requirements, the process can take in as fast as 15 minutes or less. The borrower issues a post-dated check with the amount of the loan together with the financial or lending fees written on it. Although a payday loan is so much faster and easier to acquire than a regular loan, the former can easily spiral out of control resulting in a payday loan debt trap.
To compensate on loose and simple requirements, small scale lenders wire their offered loans with sky rocket interest rates. A lender can charge up to 459% on a $100 loan on top of a financial charge that can run up to 18% or more. Put into perspective, an APR or Annual Percentage Rate of more than 400% is about 20 times greater than the average interest banks charge on credit cards.
If a borrower is unable to fully pay the loan in time, he is forced to extend the loan with additional fees being carried on top of the previous ones. It is in these circumstances that the borrower gets easily stuck in the so-called payday loan debt trap. Because of this, financial experts advise borrowers who are looking at payday loans to solve their financial emergencies to consider other personal mortgage options.
Can the Government Help with Payday Loans?
More often than not, payday loans function as a financial debt trap than an actual solution for a financial emergency. According to recent statistics, around 12 million Americans with an average annual income of $30,000 acquire payday loans every year. And a measly 14% of these borrowers are actually able to fully pay back their loans. Because of this, around 25% of these borrowers extend or re-borrow their loans up to 9 times over or more.
And it is because of these extended and recurring loans that payday lenders get to secure a profit of up to $9 billion in loan fees. On average, payday loan borrowers are stuck with their cash advance loans for up to five months at a time due to skyrocketing financial charges which primarily consist of interest rates and processing fees.
With an alarmingly growing number of borrowers being stuck on loan debt, governments consider such a system as predatory. Besides, payday loan lenders have a notorious reputation of resorting to aggressive forms of securing collections that include calling employers and relatives as well as lobbying threats of being arrested to name a few.
As if the situation is already not stressful and taxing enough, this aggravated debt collection upscales to a vicious cycle of harassment when third party collection agencies step in to settle the score.
Although there are various ways that can help pull you out of a payday loan debt, chances are that you still find yourself asking if the government can help with payday loans.
However, it depends on which state you are in. State governments have various levels of resolve in dealing with payday lenders. It ranges from provisions that regulate the size of the loan lenders can offer to the total ban of such financial practice.
As of 2020, there are 13 states throughout the USA that totally prohibit payday lending. These include the states of New York, Connecticut, District of Columbia, Arizona, Arkansas, New Jersey, Massachusetts, Georgia, Maryland, North Carolina, West Virginia, Vermont, and Pennsylvania.
In other states where cash advance loans are allowed, statutes are in place to regulate interest rates. In the states of New Hampshire, Montana, and South Dakota for example, payday loans are capped at 36% APR. On the other hand, the states of Maine and Oregon have lighter regulations placing loan APRs at 261% and 154% respectively.
Meanwhile, there are some states that work on other means at efficiently minimizing risks for a payday loan debt. The state of Virginia has set a ground rule on loans to be payable by two pay cycles maximum whereas Washington does its own regulation by allowing its citizens only a maximum of eight payday loans per year.
Currently, there are 32 states where payday loan lending is not hindered by any form of legislation. In the states of Alabama, Alaska, Michigan, Ohio, Texas, Utah, Washington, and many others, interest rates aren’t regulated.
What are Other Ways to Get Help with Payday Loans?
Have you been struggling to pay off your payday loan debt?
Don’t worry. You are just one of the 19 million Americans who are vulnerable to debt traps and it isn’t something to be ashamed of.
As mentioned earlier, only 14% of payday loan borrowers are actually able to pay off their debts. The remaining 86% are forced to make rollovers or reborrowing.
Getting another loan to help pay off another debt is a common mistake often shared among payday loan borrowers. Financial experts strongly discourage such practice for it will ultimately lead to a larger and more complex debt problem.
Take down loans with high APRs first
But if you’re already in such a situation, what you need to do first is to simplify your economic predicament. The keyword for this step is prioritizing.
Yes, take time to read into the details of your loans and find out which ones have higher interest rates. As much as possible, prioritize those with the highest figures. Target and prioritize paying off your active loans with the highest APRs.
Debt relief program
However, paying off one loan at a time can be very frustrating and somewhat annoying. Acquiring a payday loan consolidation program is one of the best first steps you can take.
This special type of settlement provides a sense of debt relief from all your existing loans by way of a single payment plan. You can either acquire one from your lender or from a third party company.
Be honest with your lender
One very important thing when it comes to dealing with your loan dues is being honest and up front with your lender. Simply tell them that you can’t pay up due to some unexpected reasons instead of making their collectors play hide and seek with you. However, be sure to do this at least a few days before your numbers are up.
This way, your lender might empathize with you and offer you lower interest rates for your loan. Other lenders offer extended payment plans especially if their business is associated with CSFAA or the Community Financial Services Association of America.
Work hard and be honest with your employer
Having a payday loan or two is a clear sign that it’s high time for you to work harder and prove yourself to your employer.
Work overtime at the very first sign of opportunity. Stepping forward at work when no one else won’t will help you build a good reputation as an employee. Once you’ve built a good professional relationship with your employer, you can try and be honest about your current financial problems, particularly on the payday loans that you’ve been struggling to pay off.
Reasonable employers have the tendency to understand and help out their employees, especially those who have already proven themselves in the company. If you are nearing your due and have been with the company for quite some time now, it never hurts to try and ask your boss for an advance.