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Small, short-term loans go by a variety of names. Most commonly payday loans or cash advances. And like most people you probably associate these kinds of loans with shady businesses dealing with desperate people. There is truth to this but some of the top providers are legitimate and heavily regulated, even if the product they provide is inherently predatory. We’re going to give the lowdown on what the payday loan industry is really like.
What Is a Payday Loan?
The typical payday loan, or cash advance, is a short-term loan of anywhere from a few hundred to a few thousand dollars. You’re given the money, generally deposited straight into your account, within a day or so. This is after providing all your relevant details, a minimal income verification, and so on.
You then have to pay back the loan, with interest, generally on your next payday. The interest is represented as APR, which comes out incredibly high. This misleading, to an extent, because it calculates interest off of a year. The loan is actually only a few weeks long. But regardless the interest is very high.
Are Payday Loans Evil?
The argument by the payday industry is they simply provide money for emergencies. In fact, they are not allowed to advertise it as “fun” (like hey get a cash advance for a big party) but they like to try to press this. Yes, there are some people that need a loan once, they pay it off, and they are on their way. But one loan usually doesn’t even pay the cost of acquiring the customer, they need repeat business.
This is the payday loan trap that people fall into. If you need money until payday chances are once you pay back your loan with interest next payday you’re short again. There are laws in place that determine how often you can take out a loan. People also refinance their loans, simply rolling it over and piling on more interest.
The laws governing payday loans vary from state to state and are very specific about the amounts, rollover limits, APR rates and even the naming. In some states, you can’t call it a payday loan, you have to say cash advance. There are also a good number of states that do not allow them at all.
So are payday loans evil? It’s a matter of opinion and how you use them. But like most businesses, the payday lenders need your repeat business. They have very smart people figuring out who needs them and who will keep coming back. It’s a sleazy industry from our experience but it can help people in some cases, people that can actually pay back the initial loan when they’re supposed to.
What is an Installment Loan?
The payday industry takes a lot of flack from the public and the government (the CFPB – Consumer Financial Protection Bureau is the main regulator of the industry). Over the last few years, the trend has been to move away from these super short-term loans to something called an installment loan. It’s more of a mid-term loan, they can last from several months to several years. The dollar amounts are usually higher than a payday loan and they are paid back in weekly, bi-weekly or monthly… you guessed it… installments.
These loans are generally a lot more customizable than the traditional payday loan. You can adjust the length of time to payback which will impact the amount of interest you’ll pay. But make no mistake, you’re going to pay a lot more than what you borrowed. Like in the 2 to 3 times what you borrowed range.
The short-term loan industry has rebranded these installment loans as a softer more caring version of the payday loan. It’s insanely expensive and can be even worse in the long run than the quick payday loan. Borrowing $1,000 to pay back $3,000 is insane. They just make it appealing because they spread out the payments to where it seems manageable.
Basically, these are more like a traditional loan that you’d see except they are for people that can’t get approved by the normal lenders. So you get blasted with interest because you’re a risk.
So Are Short-Term Loans Dangerous?
Absolutely. Don’t let anyone convince you otherwise. The payday loan industry lobbies and advertises otherwise. They tell their stories about how so and so made their life better with their product. Yeah, I bet.
Can these loans be used responsibly? Sure. Well, the installment loans are complete exploitation. But even the really short loans are generally needed by the people least able to pay them back. They are desperate.
The rates are crazy but at the same time, the cost to acquire customers and the number of loans that are never repaid keep these rates high.
With all that said the industry exists so you’ll need to decide for yourself. We suggest exploring other options first. If you do use a short-term lender make sure you have a way to pay it back before the debt cycle starts.
Avoiding Payday Loan Scams
Another thing you must watch out for is the payday loan lead generators. What are they? There are 1,000s of sites out there that just take your information and sell it to the highest bidder. They are not direct lenders. You can generally tell because there is not much info about them online, they come and go. When you use them you may be contacted by any number of companies. You have no idea who you’ll be dealing with. If you must take out a payday loan please use a trusted company that at least follows the law.
If you’d like to learn about the more reputable companies in the industry please follow the link below to see their profiles and customer reviews. We’re not suggesting you use them but if you really need to we recommend picking from one of the companies listed. There are a lot of flat-out scams out there, which only makes things worse.