by Antony Juck
Payday loans are cash advances that people can obtain for short time periods. The borrower’s employment history is proven to the lender through employment documents such as pay records and the borrower’s next paycheque is used to secure the loan.
Payday loans are cash advances that people can obtain for short time periods. The borrower’s employment history is proven to the lender through employment documents such as pay records and the borrower’s next paycheque is used to secure the loan. The period of a payday loan is generally shorter than two weeks and the loan is paid in full on the borrower’s next payday.
The loans tend to have high interest rates and often will also require a processing charge. The costs of the loan are deceptive because of the short term of each loan. When calculated over the course of a year, the compounded percentage rate can exceed three hundred percent. By comparison, a personal loan from a bank is usually between three and twelve percent. A cash advance from a credit card is about twenty-five percent per annum.
Payday loans are structured to appeal to people with low incomes and no savings accounts. Often the borrower may take out a loan to deal with an unexpected emergency expense but then after the costs of the loan are deducted from his next paycheque the borrower finds himself needing to take out subsequent loans. The resulting cycle of debt and the expense of each loan can significantly reduce the borrower’s available income. The customer is never able to save enough money to deal with the next short term emergency and becomes dependent on the payday loan system.
Unfortunately, people in financially vulnerable situations often have very few banking options. They may not be able to secure traditional credit. People in these circumstances often have low paying jobs and lack higher education. Payday loan retailers use aggressive advertising techniques directed at the undereducated population. The full cost of the loan may not be well explained. Although the borrower consents to the terms of the loan, that consent is not necessarily well-informed.
Payday loan establishments tend to operate in low income neighbourhoods. They also tend to be owned by national chains. People who do not participate in the loan process generally cash their paycheques locally and spend their money locally. When a payday loan is receivedArticle Submission, the customer’s next paycheque is cashed by the lender and a portion of the income is removed from the community as lender fees and interest. This reduces the income of the borrower and also diminishes the economy of the entire community.
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This reduces the income of the borrower and also diminishes the economy of the entire community.