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Not All Payday Lenders Are Equal
Payday loans are typically small loans that have a maturity period of two weeks. There is technically no difference between online payday loans and high street payday loans. Although they are designed to help in times of financial crisis when all other alternatives have been exhausted they can become a financial trap for irresponsible borrowers. While in a financial crisis many borrowers are unable to think clearly because their main focus is to avert the crisis and this is where they get into trouble. Borrower’s in the middle of a financial crisis don’t become overly concerned with lenders practices and therefore are less likely to notice practices that may be less than honest. Dishonest lending practices can lead to borrowers taking out multiple loans within a short period of time and paying repeated fees in order to do so creating a debt treadmill for borrowers.
Avoiding Irresponsible Payday Lenders
If at all possible borrowers should look for red flags in lending practices to avoid being taken advantage of. There are telltale signs that are indicative of poor lending practices:
1.) The payday loans direct lender doesn’t have an underwriter. Some direct payday lenders practice a business model that depends on a borrower’s’ inability to afford a loan payment and the borrowers need to borrow. Essentially this is what is known as a debt treadmill. With this practice the borrower can afford the associated fees but not the loan itself so the borrower continually renews the loan by simply paying the fees until he is able to pay the loan in full.
2.) The lender charges excessive fees. Some lenders will charge the highest rate allowed within their state which in some states is as high as an annual percentage rate (APR) of 400% or higher.
3.) The lender has a non-negotiable short-term repayment plan. Some lenders take advantage of borrowers whom they know cannot afford to repay the balance of a loan within a short period of time, typically within two weeks, little on the principal plus a fee. These lenders will waive the fee for first time borrowers with the knowledge that the borrower will more than likely be unable to afford to repay the loan by its due date and be left with no other choice other than to renew the loan by merely paying the fees until his financial circumstances change.
4.) The lender’s repayment terms require a balloon payment. Some lenders require the balance of a loan to be paid in one lump sum in a relatively short period of time making the loan difficult for the borrower to repay and increasing the likelihood that the borrower will renew the loan by simply paying the fees charged by the lender until there is a change in the borrower’s financial situation.
5.) The lender’s collateral practices are personally invasive. Some lenders don’t allow borrowers to merely repay the loan on their own accord they require a post-dated check or access to a bank account. With a loan that is tied to a borrower’s payday the lender has reasonable assurance that the borrowed money will be available to withdraw from the borrower’s account prior to the borrower running out of money or in advance of the borrower’s other financial obligations.
Responsible Lending Practices
Although, there are probably more dishonest irresponsible lenders than there are honest responsible lenders there are payday lenders that strive for integrity and to have ethical practices.
Characteristics of Responsible Lenders:
1.) Responsible lenders will limit the amount of money that is borrowed to an amount the borrower can repay without requiring the borrower to renew the loan to simply keep from defaulting on it.
2.) Responsible lenders will work with their borrowers on a repayment plan that works for both the lender and the borrower.
3.) Responsible lenders aren’t greedy when it comes to charging fees. They will charge reasonable fees for the population of people they are serving rather than the maximum fees allowable by the state in which they are located.
4.) Responsible lenders have some form of a checks and balances system in place not only to determine eligibility but to also assess the borrower’s ability to repay the loan as agreed when agreed.
A borrower’s credit report or check stub is hardly a complete picture of a borrower’s ability or willingness to repay a debt. A credit report doesn’t paint a complete picture
of a borrower’s ability or willingness to pay. A credit report doesn’t accurately reflect everyday expenses such as groceries and/or utility bills unless a borrower has maxed out other forms of credit such as bank loans, credit cards, and/or overdraft protection from a bank. This is also true with a borrower’s outgoing income and his check stub. Unless a borrower’s deductions are clearly listed on his check stub lenders aren’t given a clear picture of the borrower’s day to day expenses such as the cost of fuel to get to work or the amount the borrower pays in child support or alimony.
Characteristics of Risky Borrowers:
1.) A risky borrower has a high debt to income ratio. If a borrower has more debt than income coming in it will be more difficult for him to repay a new loan than it would someone with a low debt to income ratio.
2.) A repeat borrower is a risky borrower. Regardless of a borrower’s credit score or debt to income ratio if a borrower consistently requires roll over or back to back transactions the borrower is probably struggling with finances.
3.) A borrower with limited options is more than likely a risky borrower. Risky borrowers are unable to obtain traditional forms of credit such as low or high interest bank loans, credit cards, and/or overdraft protection through their banks.
4.) A borrower applying for multiple payday loans is a risky borrower. Any borrower in need of more than one payday loan is obviously deeper in financial crisis than small payday loans can truly help with. This can make a financial problem worse instead of helping.