The notorious Pay Day Loan (aka cash advances, check loans). The loan everyone loves to hate.
Generally marketed as a way to bridge a cash flow shortage between checks, these are intended to be high interest—short term loans.
Pay Day loans have been around for decades and have recently began offering services online. While these services are convenient, they can be very costly.
Pay Day loans provide quick access to cash. They provide temporary relief for those living pay check to pay check and don’t have access to credit via traditional means.
People in these circumstances often find themselves facing a situation requiring immediate access to funds that they don’t have. A Pay Day loan becomes their life line.
Pay Day Loans have been scrutinized and criticized for the absorbent amount of interest they charge—in some cases it is in excess of 300 percent.
They have also been accused of using predatory lending practices.
In most cases, a loan or cash advance can be secured as long as the borrower can show proof of income. This is the only requirement. Consideration is not given to whether or not the borrower can actually afford to pay back the loan AND the associated interest AND the fees in the time specified.
Even with all of the scrutiny and negativity surrounding these loans, business is booming and the market is steadily expanding. There are currently 20,000 Pay Day loan facilities nationwide. That’s more than McDonald’s.
Online Pay Day Loans
Online loans theoretically work the same as the ones procured from brick and mortar locations. There is one distinct difference. With an online loan, the lender has access to the borrower’s bank account. When the loan comes due, the account is debited for the entire amount—principle, interest and fees (some of which are hidden).
This is great if the money is in the account.
It’s when the money is not available… the nightmare begins.
Online lenders are able to repeatedly debit the account of the borrower—racking up fees. The borrower incurs late fees from the lender and each time the account is debited—depending on the bank—the borrower can be charged a non-sufficient fund (NSF) fee by the bank.
According to a report by the Consumer Financial Protection Bureau (CFPB), half of online borrowers rack up an average of $185 per loan—just in bank fees. And a third of those that are hit with bank penalties end up having their accounts closed involuntarily.
Compound all of that with the fact that the average loan takes up 36 percent of the borrower’s next pay check. Making them vulnerable to becoming repeat borrowers and trapping them in a debt cycle.
The Federal Government has announced plans to crack down on these types of loans and to add protections for the low-income borrowers dependent on them.
They are offering proposals that would:
• Require lenders to determine if a borrower can afford to repay the loan
• Restrict lenders from attempting to collect payment from a borrower’s bank account in ways that would rack up excessive fees.
“Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay,” said CFPB director Richard Cordray in a statement. “These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
Ideally, Pay Day loans and cash advances should serve as a life line for the more than 12 million Americans who use them–and for some, that is the case. But the convenience and privacy offered by using the online service, may be not be worth the cost.