The Loan Shark has been around for a long time. You borrow money from them and then might have to pay back nearly double the loan amount. Don’t pay and you could face some serious repercussions, usually outside of the law.
Still, if you needed money and could not get a loan, you might have had to turn to one of these people. If you find yourself in need of cash today and have bad credit, you might be happy to know that the Loan Shark is alive and well. They are simply going by a new name, payday loan lenders.
Payday loans are the modern day version of the Loan Shark. You can use them to get cash, even if you have bad credit. You better pay up though, or you might still face some serious problems. Although, they may not threaten to break your bones, they still have a lot of ways to get their money and make you miserable in the process. Let’s take a look at how payday loan services operate.
The payday loan company works in a fashion that is very much like a shark but they do so within the law. Payday loans are regulated in the states where they are allowed, but loosely. Some states have completely eliminated this type of lending but they are still legal in 35 states.
So, how does it work?
Simple, first you go into a storefront or apply for a loan online. You fill out a rather short application and a lender will typically verify you with an alternative credit agency. The major bureaus are hardly ever used. As long as you have a steady source of income and have not defaulted on a payday loan in the past, you will probably be approved. The state of your credit score has little impact on your approval odds.
As part of the application process, you will be asked for either a check or direct access to your checking account. You agree that when your loan is due, the lender can automatically withdraw the principal and fees from your account.
Now, for the fees. Fees can vary wildly but they are usually around $15 to $20 per $100 borrowed. So, if you borrow $200, you would pay back $230 to $240. If you need money in a hurry, you might not think this is too bad of a deal.
How do they get you?
The payday loan is a risky loan and, believe it or not, the lender does not make an incredible amount of money from you if you borrow the money and pay it back when it is due. They have to pay for advertising costs, loan defaults and regular business overhead.
No, the real money is to be had when you can not pay the loan back. The loan is almost due to be re-paid and you, the borrower, discover that you will not be able to pay it back. You contact the lender and they allow you to roll the loan over. Just pay the fees from the original loan and start a new term. The new term, will of course, come with a new set of fees.
Let’s look at a 300 dollar loan of 14 days with a $15 fee per hundred borrowed. Pay it off in time and you will pay $45 in fees with an APR of 391%. Extend it by two more weeks and you will pay $90 in fees. Do this again and your total fees will go up to $135. With borrowers often rolling over a loan 8 or 10 times, it is easy to see how you can end up paying more in fees than you actually borrowed.
Since fees on these loans can accumulate so rapidly, it is very easy to see just why the payday loan industry is such a popular one. It is extremely profitable.
How do they collect?
You better pay up, or else. No, they are not going to come at you with a baseball bat, but their collection efforts can be just as painful.
First, you must remember that you gave them access to your checking account. If you do not have enough money to pay back the loan when they try to collect, you could be hit with overdraft fees, and not just one. They will often try multiple times to collect or attempt to collect a portion of the debt. This can result in multiple overdraft charges on your account. With the average bank fee being $35, it can cause a major hurt on your account.
In addition to the pain they can inflict on your checking account, collection calls can also be a major headache. They will be relentless and some of the more unscrupulous ones might even try to scare you with false claims such as the threat of jail time.
If all else fails, and the lender wants to pursue the matter, they can also take you to court and get a judgement against you.
How do you escape?
If you have become trapped in a payday loan, you do have some options.
First, you should contact your lender and ask for an installment plan. Some states require lenders to offer you an installment plan if you are unable to pay back the loan after the first cycle. Lenders typically will not offer you this information though.
If your state is not one that has this requirement, you still may be in luck. Some lender organizations require their members to offer installment plans to borrowers as part of a good business practices policy.
Another way to escape a bad loan is to make sure that the lender is actually practicing legally. This is particularly effective with online lenders. They need to be licensed to lend in your state and loans, of course, payday loans must be legal in your state.
If you find that your lender is not legal in your state, you still have to pay back the loan but you should be able to eliminate all fees.
So there you have it, the modern day loan shark. Whenever people need money badly but do not have the credit, there will always be someone there to provide it. it will cost you though, so be careful.