Payday loans are credit facilities that are designed to be advanced for short time frames. The concept of ‘Payday Loans’ is not a new one, especially if you live in the western part of the world. There are numerous debtors who prefer to avail this facility and borrow money during exigencies, preferably repayable by the forthcoming payday. But is the picture so rosy? Like all other private lenders, payday loans also have some hidden facts and dubious lending practices that can easily trap a gullible borrower.
Here is a list of unfair practices that your payday lender will never reveal.
Exorbitant interest rates
Payday loans are available under the cloak of easier lending terms, quicker processing, flexible repayment terms and waiver of credit checks. However, all such good things also carry an interest cost in the form of ‘Annual Percentage Rate’. This interest rate can extend up 700 percentile of the loan amount and increase the financial liabilities of a borrower.
A borrower should crosscheck and compare the interest rates between various lenders and negotiate for lower rates of interest before accepting the loan offer straight away.
Loan rollover charges
Payday lenders offer a rollover of the payday loans, when borrowers fail to repay debts in time. However, a borrower fails to understand that this helpful tendency has rollover costs attached to it, which is enough to squeeze blood out of the body. The borrowers fail to realize the increase in liabilities when they are mesmerized by the sweet words of the lenders.
Trap of multiple loans
In several instances, a borrower fails to project the exact cash requirement and ends up borrowing lesser money. When the borrower approaches a payday lender for add-on credit facility, he also pays excess lending charges for the increased loan value. This extra fee is added in small letters in the loan contract papers which borrowers fail to read.
Check bouncing penalty
A payday lender can charge hefty penal charges during instances of check bounce or rejection of auto debit transactions. This penalty might extend to a quarter of the outstanding loan amount.
Apart from this, all payday loan agreements contain a clause permitting the lender to initiate legal action upon non-repayment of instalment within a week of check bounce. The penal charges combined with debt can even sum up to twice the loan amount and trap the borrower in a vicious circle of financial and legal problems. Thus, a borrower should ensure that sufficient funds are available in his repayment account on the installment day.
Corporal presence of the payday lenders
Not all payday companies have their physical presence in the area of operation. Most of them are either shell corporates which cover up their individuality with false business labels or offshore corporates which have their registered offices at tribal lands or places like Costa Rica etc. Such entities are exempt from all federal regulations and hence, it is highly challenging for the borrower to sue the lender on charges of illegal practices.
A borrower should ensure that his payday lender has a corporate office near his place of residence or at least in the same country. He should utter cautious about outstation lenders or online lenders with no specific contact details. The registered lenders might undertake certain identity and credit checks, but they are governed by the state regulations. This can be beneficial to the borrower by providing lower interest rates and other related fees.
The Office of Fair Trading has also taken stringent action in 2013 and several lenders have either shut down or withdrawn their lending business. However, a borrower should also exercise caution while availing a payday loan, whether it is online or store front office.
Aparna is a freelance writer who loves to write on her niche areas of health and fitness, business, start-up management, pets, family and relationship, career, human resources, home improvement, gardening and travel. She is a Chartered Financial Analyst and a legal professional with a decade of corporate experience. She writes for several corporate magazines and websites. You can approach her for various freelance writing assignments.