The recent changes in payday loan law have elicited much heated furor on both sides of payday loan practices. In order to understand what all the fuss is about the topic needs some clear-headed review to understand the need for regulation to keep the tendency for interest rates from running away with a borrower’s future. As with all matters that come down to taking a risk, it is incumbent upon the borrower to be wise in their decisions. However, the lenders do not always make the disclosure of the details that easy for the borrower who finds himself in a desperate situation.
Please Sir, May I Have Some More?
The concept of a payday loan is very similar to asking an employer to advance cash before the end of the pay period. The requirement to pay back the advance has always been strictly limited to the very next paycheck. Because employers are often hesitant to offer the cash advance to employees, payday loans have long been the alternative.
The Requirement for Pay Back
Payday lenders require a post dated check at the time of the loan, which will act as automatic repayment for the advance. Of course, if the funds still aren’t available on the date the check has been post dated for, the trouble begins. The check bounces, which incurs fees at the bank, as well as a loan that is now in default. The interest rate on the payday advance generally shoots up at this point, and the borrower can become quite overwhelmed by the situation they now find themselves in.
So What Has Changed?
The interest rate increases with each week the loan goes unpaid. By the end of four weeks, the borrower will find himself in a debt trap that requires repaying far more than that for which the loan was made. Recent changes in payday loan law have now capped the interest rates that these payday loan businesses can charge to match that of other lenders (banks). Such regulations don’t affect the well-intentioned lender. It’s the aggressive and underhanded lender that will often deposit the post-dated check too soon in order to justify charging large penalties for the check bouncing.
There is now also a limitation on the number of payday loans that an individual may receive. Much like the employer who would prefer not to establish the cash advance as a secondary income, if an earlier payday loan has yet to be repaid, the borrower is not eligible for another payday advance. Obviously then, this has led to the need for lenders to keep records of the loan details for purposes of inspection. They are also required to obtain a payday loan business license. This has a two-fold effect of protecting the borrower from the greed of the “loan shark” while protecting the honest lender from the negative publicity. Both the lender and the client come out ahead.
Results Speak for Themselves
Payday loan practice improvements only add to the statistics that show neighborhoods with access to these agents reflect fewer property losses, record fewer foreclosures, fewer people are treated for drug and alcohol addiction and the birth rates are not adversely affected.
The existence and continued improvement of the payday loan business notwithstanding, the same opportunities remain for those experiencing financial difficulty with unmanageable debt. Robbing Peter to pay Paul only perpetuates the problem. Consider carefully whether a payday loan or a debt consolidation plan is better suited to your financial situation.
Photo credit: Hanging in the balance by Betsssssy/flickr; Processing Paperwork by Oregon Department of Transportation/flickr;