Payday Loan Pitfalls Every Borrower Should Know About

Payday loans are credit facilities that are designed to get ahead for short periods of time. The concept of ‘Payday Loans’ is not new, especially if you live in the western part of the world. There are numerous debtors who prefer to make use of this facility and borrow money during demands, preferably repayable on the next payday. But is the image so rosy? Like all other private lenders, payday loans also have some hidden facts and dubious credit practices that can easily trap a gullible borrower.

Here is a list of unfair practices that your payday lender will never disclose.

  • Exorbitant interest rates

Payday loans are available under the guise of easier loan terms, faster processing, flexible payment terms, and credit check waiver. However, all these good things also come with an interest cost in the form of an ‘Annual Percentage Rate’. This interest rate can extend up to the 700th percentile of the loan amount and increase a borrower’s financial liabilities.

A borrower should check and compare interest rates among various lenders and negotiate lower interest rates before immediately accepting the loan offer.

  • Loan Reinvestment Charges

Payday lenders offer a payday loan transfer when borrowers fail to pay their debts on time. However, a borrower does not understand that this useful trend has reinvestment costs, which are enough to squeeze the blood out of the body. Borrowers do not realize the increased obligations when they are mesmerized by the sweet words of the lenders.

  • Multiple loan trap

In several cases, a borrower fails to project the exact cash requirement and ends up borrowing less money. When the borrower approaches a payday lender for additional credit service, he also pays the excess loan charges for the increased value of the loan. This additional fee is added in small print on loan agreement documents that borrowers cannot read.

  • Check bounce penalty

A payday lender can charge high criminal charges during cases of check bouncing or rejection of automatic debit transactions. This penalty could be extended to a quarter of the outstanding amount of the loan.

Aside from this, all payday loan agreements contain a clause that allows the lender to initiate legal action for failure to repay the facility within one week of the return of the check. Criminal charges combined with debt can even add up to twice the loan amount and trap the borrower in a vicious cycle of financial and legal trouble. Therefore, a borrower must ensure that sufficient funds are available in his repayment account on the day of delivery.

  • Bodily presence of payday lenders

Not all payday companies have a physical presence in the area of ​​operation. Most of them are shell corporations that cover their individuality with fake business labels or offshore corporations that have their registered offices in tribal lands or places like Costa Rica etc. Such entities are exempt from all federal regulations and therefore it is very difficult for the borrower to sue the lender on charges of illegal practices.

A borrower should ensure that his payday lender has a corporate office near his place of residence or at least in the same country. You need to be very cautious of external lenders or online lenders without specific contact details. Registered lenders can perform certain identity and credit checks, but they are governed by state regulations. This can be beneficial to the borrower by offering lower interest rates and other related fees.

The Fair Trade Office has also cracked down in 2013 and several lenders have closed or withdrawn their loan business. However, a borrower must also exercise caution when availing a payday loan, either online or at the main store office.

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