Consumer Advocacy Groups And Congress Consider: The Payday Advance Loan Product
By Carolyn Heidmann
Many of us have endured a financial hardship at one time or another; unfortunately, finding a way to dig your way out of debt can pose to be quite a challenge for people of all income levels.
In recent years, low cost payday loans have become an increasingly popular method to remedy immediate financial needs. However, the lack of government oversight on lenders who offer these short-term loans has caused a significant amount of concern for many consumer advocacy groups. In recent years, many politicians and consumer groups have taken steps to ensure that the practices of payday advance companies do not take an unfair advantage of those who are most in need.
A low cost payday loan, in the hands of a responsible individual, can be an excellent way to solve short-term financial problems. The borrower fills out a brief application; the lender then reviews this information to decide if the borrower will meet the terms of the payday advance. The qualifications for the average borrower are quite low since most lenders do not actually perform a credit check. The consumer receives their funds on the same day and is expected to repay the low cost payday loan when they receive their next paycheck; this is generally within one to two weeks.
Best When Used By Responsible Borrowers
This situation sounds rather harmless. Actually, it is an ideal situation for the responsible borrower. Unfortunately, there are a number of borrowers who do not consider the complications and penalties they can incur if they are not levelheaded about the terms of their payday advance.
There is no application fee for a low cost payday loan, thus lenders charge a transactional fee to keep the loan lucrative. For a loan of $100, the average borrower can expect to pay a fee, which roughly amounts to $18. That amount is negligible if you consider that the same borrower might pay $25-$35 if they are late in paying one of their bills or if they bounce a check.
The fees for a payday advance are extremely reasonable, when you weigh them against late payment fees and the dings to your credit rating that late payments can produce. Payday advance fees are easily manageable, as long as the borrower repays their loan on time. Those who prolong the repayment of their low cost payday loan, however, can accrue many extra fees resulting in significant financial penalties. Since the fee for a payday loan is calculated on a really short time window of generally one or two weeks, the loan fees will continue to increase exponentially until the payday advance has been repaid in full. This means that the initial predicted fee can double, triple, or possibly quadruple in very short order. If the borrower is too lax about repaying their loan, they could end up in deeper financial strains than they were in when they took the original loan.
When you consider that some borrowers are already experiencing serious monetary difficulties, logic dictates that this selfsame borrower might also fall behind on the repayment of their payday advance loan. In fact, there are some who use new low cost payday loans to repay earlier loans. Others have come to depend upon payday advance loans as a way to manage their monthly bills. Studies have shown that the average borrower uses this service eight to twelve times per year. This approach to payday advance loans (also known as cash advance loans, check cash advance loans, faxless loans, same day loans, no teletrack loans, etc.) is not financially prudent. In the hands of a responsible individual, a payday advance is considered a last resort method to resolve an immediate financial need.
Consumer Advocate Groups Have Approached Congress For Relief
Some states have developed new laws
to protect consumers from the complications that can arise from the careless use of this type of service. It is important to understand that low cost payday loans are completely legal, but some of us need additional aid to prevent us from making ill-considered financial decisions. Until recently, there were few national restrictions upon this kind of service. In May of 2006, the House of Representatives proposed an amendment to the Truth in Lending Act to enhance state laws revolving around payday advance loans.
There are many reforms that the House would like to see in regards to payday advance loans. A number of these changes revolve around the contract which the borrower signs. According to the current bill making the rounds in Congress, the contract would highlight the maturity date for the payday advance loan, the fees associated with the loan stated both as an APR and as a projected dollar amount, and the penalties the borrower would incur if they should repay the loan after the agreed upon date. They would also like the lender to perform some sort of a credit check to ensure that they are lending this money to someone who will repay their debt in a timely manner. Additional changes that congress members would like to see include a cap upon the APR and a limit upon the number of loans a person can have within a specified amount of time.
These alterations to the average low cost payday loan agreement would benefit the consumer as well as the lender. If both parties are clear about their terms, it should ensure that the transaction would run smoothly. However, until this bill is finalized, it is important that consumers approach payday advance loans in a self-responsible manner. This means they should use the service sparingly, repay their debt by the loan’s maturity date, and carefully review their contract with the lender before signing.