Consumer's Guide to Payday Loans

Payday loans may seem like great options at certain times in anyone's life. Sometimes, a person gets short on cash and short on funds, and as a result, it may seem like a payday loan is a good idea.

While the initial reaction to being short on funds may be to get a payday loan, it can actually be a very bad idea. The truth is that there are much better options out there than a payday loan, and although payday loan companies definitely won't tell you this, many of the payday loan lenders are offering loans that aren't legal in many different states.

The Way Payday Loans Work

Payday loans work by offering a customer a certain amount of money, such as $300, in the form of a quick loan. The customer only has about 14 days to a month to pay the money back, and if the customer doesn't pay the entire amount of money back, the interest and payments simply begin to accumulate.

Payday loan companies advertise and talk about how they offer fast loans for anyone and how they can deposit money into a person's checking account within 24 hours. While this may be true in most cases, they will then focus on bleeding that bank account dry once the loan comes due, and the truth is that payday loan companies really make the most money when people do not payback their entire loans right away.

Giving A Payday Loan Company A Bank Account Number

Once a person gives a payday loan company a checking account number, they can theoretically take money out of the checking account whenever they would like to.

While many payday loan companies will only take money out when they say they will, there are countless reviews and rants on the Internet about payday loan companies taking more money out of a checking account than they should, taking money out of a person's bank account before they should have, taking money out on a different date than they should have or taking more money out after they have already withdrawn a payment from the person's bank account for interest or principle.

According to many complaints to the Attorney General's office in many different states, payday loan companies do sometimes take out money when they're not supposed to.

The majority of people who get a payday loan are already short on cash, and if a payday loan company takes a payment out of a person's bank account before they're supposed to, it can easily make a person go into overdraft and cause more fees.

Extremely High Interest Rates

Everyone has heard about the ridiculous interest rates that payday loan companies charge, but many people do not realize exactly how high these interest rates actually are.

If a person is applying for a credit card, a credit card that offers an interest rate of over 20% will be considered a rip off, and unless a person is really just trying to rebuild their credit or don't care what their interest rate is, they're not going to get a credit card with an interest rate that is 20% or more.

Payday loan companies charge interest rates that are way beyond anything that most people and most companies can conceive of. Many payday loan companies charge in excess of 300% in interest rates.

A 300% interest rate means that a person who takes out a $300 payday loan will have to payback $1,200 if they waited an entire year to pay it off. The first $300 would go for the principle, and $900 would go for the interest.

Payday loan companies justify these very high interest rates by saying that they are serving people who really need cash fast, and they claim that getting a payday loan can be better than some other options. While that may be true in some cases, there are always better options than a payday loan.

Excessive Fees

In addition to crazy interest rates, many payday loan companies charge excessive fees for their loans. Some payday loan companies charge a $50 fee to get a loan.

If a person is getting a long-term loan of $25,000, a $50 is actually low. When a person is getting a payday loan of $300 that already is charging 300% or more in interest, a $50 is quite high and unnecessary.

Usurious Interest Rates

Hundreds of years ago, it was considered a crime to charge interest rates on a loan. While this no longer the case, it is still morally wrong to charge interest rates above a certain amount on a loan.

Usury can be defined as the illegal action of lending money at unnecessarily high interest rates, and in most states, usury is illegal.

In years past, usury could be punished in a wide variety of ways; however, usury is usually just punished or dealt with by a slap on the wrist in most states today.

Most payday loan companies still practice usury today, and when it comes to payday loan companies, there are few exceptions.

Payday loan companies use a wide variety of different methods to get people to sign up for their loans, and once a person has signed up for and received a payday loan, the payday loan companies will do everything that they can to keep the person paying interest to their company.

Payday Loan Laws And Laws Against Certain Interest Rates

Many states have passed laws that are specifically aimed and targeted at payday loan companies, and these laws are designed to prevent any payday loan companies from operating in the state.

Most of the laws that many states have passed initially were simply laws that prevented lenders from charging interest rates that were above a certain rate.

For example, a state may pass a law that says that a lender may only charge up to 35% in interest for any loan or type of credit. While 35% surely isn't a very good interest rate, it's not nearly the amount of interest that most payday loan companies charge.

These laws are designed to allow lenders that want to lend to people with bad credit the ability to do so by still charging relatively high interest rates, such as 25% or 35%; however, these laws will simultaneously stop payday loan lenders that charge 200%, 300%, 400%, 500%, 600%, 700% or more for their loans.

Getting Around The Laws

Payday loan companies have devised many methods of getting around the payday loan laws and the laws that are against usurious interest rates in many states. Many payday loan companies have implemented policies that are specifically designed to get around these laws, and they teach their employees to focus on using these policies very frequently.

In order to get around the laws that many states have regarding interest rates, many payday loan companies have simply lowered their interest rates to a relatively low and very reasonable 8%; however, they have raised their fees much higher.

For example, a payday loan company that offers an interest rate of 8% to 10% in a certain state would technically be operating legally in that state; however, by having a $150 fee for a payday loan of $300, $45 fees for any subsequent payments, and $15 signing and origination fees, the payday loan company will still make a lot of money in addition to the interest that it is earning from its loans overall.

Many payday loan companies have designed and implemented new fees that most people in the financial industry have never even heard of, and as a result, most states have no laws passed that are designed to stop or prevent these types of unnecessary and very high fees.

Creating New Laws

In response to many payday loan companies attempting to get around the new laws, many states have passed newer laws that are designed to prevent payday loan companies from operating altogether in the state.

The new laws that have been passed by many states prevent a lending company from charging a certain amount of money in interest and fees, and as a result, payday loan companies have had to stop operating in certain states.

While many states have passed these types of laws in order to stop payday loan companies from operating in their state, there are still many states that do not have such laws. Payday loan companies can operate in many states simply by offering relatively low interest rates and charging very high and unnecessary fees for their loans.

Paying A Payday Loan In Full

When a person gets a payday loan, they have the option of paying it in full on the due date. Usually, this is the best option, and it can save the customer the most money while simultaneously giving the least amount of profit to the payday loan company.

If a person takes out a payday loan, they will be given a due date. A person simply has to go on the website of the payday loan company or call the payday loan company to see their due date. When the due date comes, the payday loan company will automatically withdraw the funds of the loan and the interest of the loan from the person's bank account.

Once the funds have been withdrawn, the payday loan should be considered paid in full, and the payday loan company should not want to get anymore money from that customer.

If The Funds Aren't In The Bank Account

If the funds that are required to pay a payday loan aren't in a person's bank account when the payday loan company attempts to withdraw funds, the payday loan company will take out the funds anyways even if it means that a person will become overdrawn on their bank account.

An ACH Block

Funds are withdraw by a payday loan company by using ACH transfers. ACH, also known as "automatic clearing house", transfers are the fastest and easiest methods of transferring money for people and companies across the country and across the world; however, payday loan companies take advantage of these exceptionally easy, convenient and fast transfers of funds for their own profits and their own purposes.

A person can stop any ACH transfers from coming out of a bank account by placing an ACH block on their checking account. An ACH block will immediately stop all ACH transfers that the person hasn't specifically authorized by calling their bank, and it is an outstanding and very effective tool for stopping payday loan companies from withdrawing from a bank account.

Some banks will attempt to charge fees for placing an ACH block on a person's bank account. There should be no fees for placing the ACH block on the account, and it doesn't cost the bank anything to do so.

If a bank attempts to charge fees to place an ACH block on a bank account, a person should simply explain to the representative or the customer service agent of the bank that they know that it doesn't cost the bank anything to place an ACH block on the bank account, and they are not going to pay any fees to have it done.

Closing The Bank Account

If a payday loan company has a hold of a person's bank account number and routing number, it may be a good idea to take another step and close the bank account altogether. If a person wishes to do so, they can easily and instantly open up a new bank account with the same bank or with a different bank.

By closing the bank account, the payday loan company will never be able to get into the bank account to take any payments or any unnecessary payments. As a result, a customer will be able to easily pay any payments that they wish to give the payday loan company on their own terms by using by using a money order or another form of payment.

Rollovers

Payday loan companies make the most money when their customers get rollovers on their payday loans. A rollover occurs when a person decides to only pay the interest for the payday loan on the due date, and in addition, the actual payment for the entire payday loan is prolonged to a new due date when a rollover occurs.

While some people may think that this sounds like a good option, it's actually a terrible option. When a rollover occurs, a person pays the interest for the payday loan, but they're simply making an extension payment.

On the next due date, the entire amount of the principle of the loan plus the entire amount of the interest of the loan will be due in full. If a person decides to get a rollover a second time, they will pay the amount of the interest for the loan again, but the entire amount of the loan plus the interest will be due on the next due date.

For example, a person that gets a payday loan of $850 will likely have a payback amount of around $1,250. If the due date is in two weeks, the person has a choice of paying the loan back in full or getting a rollover.

If a person gets a rollover in this situation for their payday loan, they will pay $400 in interest on the due date; however, the full amount of $1,250 will still be due on the next due date two weeks later. In this scenario, the person would be paying $400 every two weeks on the payday loan without actually contributing to the amount of the payday loan that will have to payback, every penny of that $400 every two weeks is profit for the payday loan company.

This scenario is a realistic scenario that Attorney Generals in many states see frequently, and the FTC is doing their best to set up laws and regulations to stop scenarios just like this.

Many states have limits on how many rollovers a person can get on a loan, but in many states, the limits are around 7 or 8 rollovers for the same loan.

Installment Loans

Many payday loan companies are now offering installment loans. While some people may think that installment loans are a better alternative to payday loans, they are actually just larger versions of payday loans.

Some people think installment loans are better options because they offer a larger loan and set monthly payments when paying the loan back. In reality, these installment loans that many payday loan companies are offering have the same high interest rates as most payday loans, and the set monthly payment is ridiculously high.

For example, if a person gets an installment loan of $2,200, they will have to make 8 payments of around $650 with most payment loan companies. If they actually make these payments, the person will end up paying $5,200 back for the $2,200 loan. This amount is clearly a ridiculous and unnecessary profit for the payday loan company, and it is taking advantage of people that really need funds to make as much money as possible.

If a person just made the first four payments on this type of installment loan, the payday loan company would still make a decent profit. All payments after these first four payments are simply to further increase its unnecessary profits from people that really need the money the most.

As with most types of payday loans, these installment loans are illegal in most states based on their interest rates and on their fees.

Payday Loan Companies And Collection Agencies

Payday loan companies and collection agencies are similar in many ways, and in many cases, they work together to get as much as money as they possibly can from customers.

These two types of companies use different techniques to benefit from one another as much as possible, and by using these techniques, they attempt to extract the largest amount of money from each payday loan that a person gets.

If a person doesn't pay their payday loan or make the full payment on their payday loan, the payday loan company will likely send it to a collection agency. A collection agency can buy the debt for pennies on the dollar, or they can actually work with the payday loan company and get a commission if a person pays a certain amount of the loan.

A collection agency will attempt to use a variety of methods to get a person to pay the amount of the payday loan that they feel the customer owes. It's important to realize that most collection agencies operate by buying unpaid loans for about 10% to 20% of what they're actually worth.

For example, a payday loan company may buy a debt of $500 for $50, and if the collection agency collects $500, they earn a profit of $450. When dealing with a collection agency, it is always important to remember that a customer can offer them much less money than they're asking for and still have their loan paid in full.

If A Payday Loan Company Sues You

If a payday loan company files a lawsuit, there are many things that you can do. This is a civil lawsuit, and a payday loan company that threatens sending you to jail is violating the law. Debtor's prison was abolished centuries ago, and a person cannot go to jail because of a loan or a civil lawsuit.

If a payday loan company sues you, the last things that you want to do is not show up for court and not respond. If a person doesn't show up for court and doesn't respond to the lawsuit, the judge will likely rule in the plaintiff's favor by default, and as a result, a person will have a judgement entered against them.

The best thing to do if a payday loan company sues you is fight. File a response to the lawsuit, and explain the situation and the usurious interest rates and fees that the payday loan company charges. Find out about the laws in your state regarding interest rates, fees, lending practices and payday loan companies and use them to your advantage. Many payday loan companies are operating out of state, and many are operating illegally in certain states.

If a payday loan company has used immoral and ridiculous collection practices, mention that in the response. Many of these practices are against FDCPA laws and regulations, and they can easily result in a case being thrown out of court.

If A Payday Loan Companies Threaten To Sue You

It is absolutely against the law for a payday loan company to threaten to sue you unless they are actually planning to. In addition, a payday loan company cannot sue you out of state, they must do so in your state. If a payday loan company that threatens to file a lawsuit is not actually planning to sue you, contact your Attorney General and file a complaint.

99% of the time, a payday loan company will not sue you. A judge will hardly ever rule in a payday loan company's favor, and many times, a payday loan company will have already violated so many regulations and laws that they won't have a chance at winning the lawsuit. In addition, a payday loan company must be licensed to operate in a state, and if they are not licensed, the case will get thrown out of court automatically.

Better Options Than A Payday Loan

There are many options that are much better than getting a payday loan. A payday loan is a very bad option in almost every situation, and a person can look for much better options if they need funds fast or if they are currently in a tough financial situation.

Saving For A Rainy Day

A person should always save some money for a rainy day. While it may be easy to say this in hindsight after a person has already taken out a payday loan, saving up for a rainy day can help to ensure that a person always has enough money.

It's important to realize that by saving for a rainy day and having extra money saved up in the bank, a person will never have to find places to borrow money because they will always have enough.

Checking Accounts And Saving Accounts

A person can use a wide variety of different types of accounts to save money. Savings accounts are specifically designed for saving money, and they are excellent options for consistently saving a large amount of money. Many savings accounts may charge a fee if a person makes a certain amount of transactions with the savings account within a month, and these accounts are specifically designed to be used to save money.

Checking accounts can also be used to save money. While they are primarily designed to be an account for liquid cash, they can be a great place to save money, and checking accounts will never charge any fees if a person makes any amount of transactions within a month.

Many banks are now offering incentives for people to open a checking account with them. Some banks are offering $100 or $150 to open a new account, and now, many banks allow people to get started by opening a checking account online or even over the phone.

Opening a checking account or a savings account is very easy, and most banks only require a very small deposit to get started with a checking account or a savings account.

Traditional Loans

While saving money is a great way to ensure that a person always has enough money for a rainy day, more traditional loans can be excellent options if a person needs funds fast. Traditional loans are much better than payday loans, and usually, they give a person a lot of time to pay the funds back with reasonable interest rates and low fees.

In addition, more traditional loans usually provide a person with more money than a payday loan might provide, and this can be a huge advantage if a person needs more than just a couple hundred dollars very quickly.

The application process from a more traditional loan is usually quick and easy, and a person can apply simply by filling out some basic information online. There are many lenders that will offer loans, such as banks, credit unions, financial institutions and certain companies.

Usually, more traditional lenders will charge interest rates that actually follow the state's laws regarding interest rates, and while there may be some fees associated with most traditional loans, these fees are generally much less than those that are charged by payday loan companies.

Traditional loans will usually give a person many months or years to pay the loan back, and a person will have a set monthly payment that allows them to easily pay the loan back consistently.

Credit Cards

Credit cards can be much better options than payday loans, and while a person has to ensure that they don't run up a high balance on their credit cards, they can get a much better interest rate, much better and more convenient terms and conditions and much lower fees by getting a credit card instead of a payday loan.

Credit cards almost always have a credit limit, and a person should only spend as much money with their credit card as they need to in order to avoid going near their credit limit. If a person goes over their credit limit, they could get a fee and have to pay more money to the credit card company; however, the amount of any fees that could be charged by a credit card company as the result of a person going over their credit limit is still much lower than most fees that are charged by a payday loan company.

Charities

If a person is truly low on funds on a consistent basis, they can look to charities to help them out. Charities are there to help people that really need it, and many charities will be happy to provide a person with funds if they need them.

A person can find a charity in their area by looking online, looking in the phone book or calling a local food bank. Before a person goes to a charity center, they can check out the website of the charity or call the charity to find out about the specific services and help that the charity offers, and this will help them to get a much better idea of how the charity can help them.

Credit Unions

Credit unions offer traditional loans of all types to people, and even if a bank won't lend money to a certain person, a credit union probably will.

Credit unions provide convenient terms and conditions for people, and many times, the payments that a credit union offers its customers are very flexible. A credit union can disperse the funds of the loan to a person that needs the funds very quickly, and many credit unions offer loans of all different types and sizes to their customers.

Borrowing Money From A Friend Or A Family Member

Most people don't think to ask to borrow money from their friends or family members, and it is up to the particular person whether or not they would like to ask a friend or a family member to borrow money.

Borrowing money from a friend or a family member is a much better option than getting a payday loan. Usually friends or family members won't ask for any interest on the amount of money that a person borrows, and the person can set up a convenient and easy payment plan.

Even if the friend or family member doesn't ask for interest on the amount of money that the person borrows, the person can consider giving a little bit of extra money back when paying back the loan. Borrowing funds from a friend or a family member can save a person hundreds or thousands of dollars that they may have spent by getting a payday loan instead.

Government Help And Aid

The government has a wide variety of programs to help people that really need funds, and the federal government and state governments are usually more than willing to help people if they meet certain criteria.

A person can research certain government programs in their area by looking online, and they can call the centers for these different aid programs and ask about the type of help that they provide.

These types of programs are specifically there to help people, and they are not designed for people to use them for years and years. The reason that some of these programs are having tough financial times themselves is because large numbers of people are using these programs for years and years instead of using them as a boost.

Many people can stay on these programs for months or even years, and if a person really needs funds, these programs are much better options than payday loan companies. They provide the funds that a person needs for food, rent, living expenses and certain other expenses that a person may have.

Churches

Churches want to help people, and usually, a church is more than willing to help a person that is really in need. If a person is truly low on funds and needs money to pay for rent or for basic living expenses, they can look for local churches that are willing to help them out.

In addition, churches sometimes have charities for people that are in need in a certain area, and these charities are specifically designed to raise money for people who need funds.

Credit Scores

Payday loans can significantly affect a person's credit score. If a person doesn't pay their payday loan back or falls behind on their payday loan payments, their credit score could be affected. There are reports of people that have gotten rollovers for their payday loans having their credit scores affected because the company reported that the payday loan wasn't paid in full. This can happen despite the fact that most payday loan companies actually encourage people to get rollovers for their payday loans.

If a payday loan is affecting your credit score, the first thing to do is find out if the particular payday loan is actually legal in your state. If it isn't, a person can send a cease and desist letter to the payday loan company that demands that they immediately cease reporting the illegal payday loan on their credit report.

In addition, a person can send an official letter to the major credit reporting agencies and ask them to remove the particular payday loan from their credit reports. If a person provides sufficient evidence that the loan is actually illegal in a certain state and explains that the interest rate and fees of the loan are against the laws of their state, the credit reporting agencies will usually oblige and remove the loan's report on a person's credit score.

Payday Loan Advertising Tactics

Payday loan companies usually use unscrupulous and relatively shady advertising techniques and strategies to attract new customers to their payday loan companies.

They advertise by saying that they offer funding instantly, and they show a certain amount of money, such as $1,500, as the loan amount that they may offer even though they actually don't offer that amount to most customers.

In addition, payday loan companies can usually be found advertising and setting up shop in areas where people already have relatively low incomes, and as a result, they are taking advantage of the people that already need the money the most and profiting from them.

Payday loans can charge ridiculous and unnecessary interest rates and fees. 300% to over 800% interest rates are the rates that are charged by most payday loan companies, and these very high interest rates can be charged in addition to fees. It's also important to remember that most payday loan companies actually encourage rollovers for their loans, and this is the worst option that a person can choose because it gives the payday loan more money and takes the most money as possible from the customer.

There are much better alternatives to payday loans, and these alternatives can help a person get the funds that they need very quickly. A person can consider saving money with a savings or with a checking account, more traditional types of loans, credit cards, debit cards, borrowing money from a friend or from a family member, federal government or state government help and aid, charities, credit unions and churches.

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