Do you know that 12 million Americans take out payday loans every year? According to Pew Charitable Trust, lenders offer these types of loans to low-income borrowers, who have to pay them back within a few weeks. However, critics have long convicted the lending industry for charging disproportionate interest rates that leave borrowers trapped in unending debt cycles.
What Is Payday Loans?
They are small, short-term unsecured loans, also referred to as payday advances. These loans attracts high interest and are based on your credit profile and income. Laws concerning these loans differ widely between different states within the United States. Some jurisdictions limit the APR – Annual Percentage Rate charges, to control unreasonable interest rates. Others have entirely outlawed the lending of payday advances while a few have put some restrictions.
Understanding Payday Advances
Payday advances are unsecured guaranteed loans that don’t require any collateral, and this makes them a type of cash advance that charge high levels of interest. They have a reputation for awfully high interest and other hidden provisions that charge customers additional fees.
Payday lenders are regulated by CFPB (Consumer Financial Protection Bureau) regardless of size. Some states require all licensed lenders to limit the number of loans you can take at a single time. They are required to conduct real-time verification of your eligibility to service a loan before they can give you one. States that have outlawed payday lending records the lowest rates of bankruptcy.
Obtaining a Payday Advance
Payday advances are available through small credit merchants that allow onsite loan applications and approval. The lenders have physical locations, although the lending services can also be available online. To apply for a payday cash advance, you must provide a paycheck document from the employer showing your current level of income. The lenders base their calculations on a percentage of your short-term income to get the loan principal. Other factors include your credit history and credit score obtained from a hard credit inquiry at the time of your application. As of 2020, the United States’s District of Columbia and other 12 states have banned payday advances.
Payday Advance Interest
The interest rates for cash advances are incredibly high and can range up to 500 per cent in APR – Annual Percentage Yield. Some states have laws that limit the charges to about 35 per cent. However, the lenders fall under exemptions making these loans qualify for lending loopholes that you must watch out. The federal “Truth in Lending Act” requires all lenders to disclose the interest charges, but many customers overlook the costs. Most loans are from $100 to $1,500 payable within 30 days or less, thereby allowing you to meet your short-term financial needs. Cash advance loans can be extended for additional interest charges, and this has made people end up repeat borrowers.
To sum up, short-term payday loans are a common way of loaning people in the United States. These loans come with high-interest rates that become due at the next paycheck. Research to evaluate the welfare impacts of cash advances to low-income earners in the United States is essential.