Payday Loans – Process, Reasons and Criticism

Payday Loans – Process, Reasons and Criticism

A payday loan can also be termed as an advance cash loan which is both short and small term. It is more of a kind of an unsecured loan where it is not guaranteed that the repayment will be made by the borrower; this is the reason due to which it is kept short and small term. In other words, they can also be termed as cash advances.

For example, the credit card can also be said as the license of the payday loan that provides some cash that is prearranged within a limited line of credit. Payday loans depend on the previous loyalty and behavior of the consumer and it varies diversely from one place to another. To make sure that unnecessary and more interest are not applied, there are some jurisdictions and rules that keep the interest under limits. It is termed as Annual Percentage Rate (APR).

Some of the jurisdictions do not bother about payday loans and its interest, while others have only few controls over it. In the United States of America, the interests are restricted by some percentage say about 36-40 percent.
There are many ways to determine the annual percentage rate. But it is generally considered that the lender, who is lending the payday loan, is more vulnerable to risks. Recently, several factors have been determined and it is very clear that these loans do not pose any threat to the lender for long term risks.

Process of the loan

The most important and basic way of lending is that the lender will provide some amount to the borrower, and the borrower will have to return the amount with the interest in the next payday. And this whole transaction will be short term. It is always a better option to verify the salary and other necessary stuffs about the borrower. But some payday lenders do not bother about verifying all these. Franchises and individual companies have their own terms and conditions of providing loans.

Generally the payday loan can be borrowed by visiting such a store or company that lends such loan. Now in the next paycheck, the borrower will write a check that is post dated and hand it over to the lender, which is having the sum of the full amount and the additional charges. As the maturity date arrives, the borrower will have to personally visit the store and pay the entire amount in cash. If the borrower fails to visit and return the complete amount, the lender may visit the bank and redeem the check.

If the savings account of the borrower has got a shortage of amount and does not meet the necessary amount, then he may get a check bounce from the bank and thus additional interest will get imposed on the borrower as he is unable to return in due date.

In recent days, there are some companies that provide loans through online. In this the borrower has to undergo through a form filling process of required documents and the loan is automatically transferred to the account of the borrower. As the lender reaches the payday, the amount is electronically transferred to the account of the lender.

Borrowing Reasons

There can be several reasons for borrowing a payday loan. Some of them are listed below.

  • Urgent requirement of money for medical treatment or any kind of monetary issues.
  • Low or unsatisfied income of an individual or a family.
  • To satisfy another loan credited which the borrower is unable to pay.
  • To cope up with the economic crisis that the person has suffered due to extreme loss in his business.

Research says that the maximum number of people belongs to the age group of 25-44 years. In this age group, there are several categories such as widows, divorced wives, those who don’t have a college degree and those who are home renters. Most of the people use payday loan just to fulfill their basic requirements

Criticism

  • Poor people are getting more and poorer – So it is very clear that those who cannot fulfill their daily requirements are more subjected to borrow payday loans. Since, these payday loans are a bit riskier than any other loan, that’s why the lender imposes some additional interest. This results in draining the income of poor people.
  • Advertisements- Several payday lenders promote themselves by providing ads on social networks or in TV or radio channels. This also helps in promoting payday loans.
  • Aggressive collection practices- if the lenders do not get paid in due date, first of all they request gently and if this also fails, then they violate the borrower physically or mentally or both.
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