Borrowers with low credit scores or no scores at all are the main target market for payday loan lenders. Two advantages make this option lucrative to borrowers. One is the fast access to loan amounts, and the second is the absence of rigorous credit checks that characterize other loan options.
However, these loans come with high interest rates and need to be repaid once you get your paycheck. This is a dangerous option because of the likelihood of falling into a vicious debt cycle, leaving you in a worse state than when youstarted.
To get an idea of how these lenders take advantage of susceptible borrowers, the Federal Trade Commission recovered a whopping $505 million in restitution in 2018 after suing AMG Services for deceptive lending tactics. paired with hidden charges and illegal withdrawals. In fact, according to the FTC, this is the largest refund in their history, affecting at least 1.1 million borrowers.
Borrowers now have protection from these predatory lenders in the form of a Payday, Vehicle Title, and Certain High-Cost Installment Loans rule by the Consumer Financial Protection Bureau. However, as the payday “evil” is exorcised, a new is emerging in the form of installment loans.
Installment Loans
These loans originate from consumer finance companies rather than banks because they are part of the non-bank consumer credit market. Often, borrowers with poor credit scores and low income are the usersof these loans because they don’t meet abank’s requirements.
Typically, the loan amount falls between $100 and $10,000 for bad credit guaranteedwith a repayment period of between 4 and 60 months. Also, you can choose between an unsecured or secured loan. the latter meaning you’ll have to put up collateral to secure the loan.
Installment loans and payday loans share some similarities such as their terms. Both are intended to be short-term and target borrowers with low credit scores and low-income. However, the lending methods in both are wide apart.
Why Short-term Loans are Problematic
According to Pew Trust, 12 million Americans take out payday loans. That’s not all;11% of Americans with zero credit history access credit through payday loans. This leads to the question, “How come financial advisors warn against them?”
With payday loans, lenders have access to the borrower’s checking account. When it’s time to pay up, the lender will withdraw the agreed payment automatically from the account. Yes, even when the borrower’s balance isn’t enough to meet the payment, the lender will initiate an overdraft – an expensive affair because you’ll pay twice, for the bank service and for the payday lender.
While this seems intrusive and inconsiderate, payday loans are easy to access, which makes it easy for borrowers to opt for this option., predatory though it may be. All the borrower needs are an ID, proof of employment, and of course, checking account details.
The best part is that payday lenders don’t evaluate credit scores, meaning borrowers unlikely to repay the loan are the main target market. This is also the reason why these borrowers end up in a vicious debt-cycle, unable to detach from this process.
A perfect example of this cycle is captured in the Star-Telegram where a $490 loan turned into $1,700 for a woman living in Texas. The loan was from ACE Cash Express and was the third that year. The script is the same all over. Borrow and if you fail to pay, the original loan is rolled over into a bigger one,and the repayment schedule doesn’t change.Couple that with high fees and interest rates (as high as 400% or higher) and you can see why financial advisors discourage this option.
Installment Loans: The Risks Associated
- Installment loans appear to be the best alternative in terms of cost for borrowers, but they also come with their own set of risks.
Charging fees and selling unnecessary products are two harmful practices that state laws permit in the lending market. Credit insurance is one of the unnecessary products sold along with installment loans. According to Pew, the insurance doesn’t offer as many benefits to the consumer as it does to the lender. In fact, it increases the loan costs by over a third. For the lender, the insurance protects them against losses if the borrower fails to repay the loan.
- Refinancing is common with installment loans and to achieve this, borrowers must incur extra expenses in the form of nonrefundable acquisition or origination fees. This means the borrower will have to dig deeper to borrow.
How to Borrow Money Safely (Even with Bad Credit)
A recent Bankrate survey found out that 60% of Americans cannot handle a $1,000 emergency. The survey also questioned households and found out that a third of them encountered at least a single major emergency in the last year.
Credit cards offer a way out of a cash crunch but not everyone has access to one. Credit scores largely determine the type of loan terms a borrower can get from a lender. Those with low scores find it difficult to get fair terms, leading then to opt for installment or payday loans.
Having said that, several lenders offer bad credit loans, but finding genuine ones in a market filled with scams is an uphill task. Therefore, you need to be critical and proactive when shopping around for these loans to find credible lenders.
Here are some pointers you can use:
- Customer service: What is the availability of customer care agents during the application process? Do they have real humans at the other end of the phone?
- Flexibility: Are the loan terms negotiable, given a borrower’s financial situation?
- Lender credentials: The Consumer Financial Protection Bureau has a massive database that contains customer complaints and general feedback regarding various companies. This is a great place to start when evaluating lender credibility.
- Service reach: Isthe lender o in the US, or are they an off-shore company? Are they licensed to operate in all states?
- Fees: This has to do with upfront fees. Do they require upfront fees? If they do, don’t bother moving to the next step because this how scam artists start out.
To analyze your credit, lenders will perform what is known as a soft inquiry on your credit report. Often, credit inquiries take some points off your overall score but don’t worry because a soft one doesn’t harm your score. A hard inquiry, on the other hand, will knock off some points from your score.
