Most consumer advocates consider payday loans a variation of predatory lending. Proponents of payday loans say that these types of loans fulfill a need. Whichever side of the debate a person may fall in, the fact is that many people across the country are accessing payday loans without knowing exactly how they work or what they are about.
Here are ten things that any potential borrowers of payday loans should know before taking out a payday loan:
1. The most important thing that potential borrowers should keep in mind when considering taking a payday loan: PAYDAY LENDING IS NOT CHARITY. Payday lending is a lending business and the lenders are not in it to help the borrower out of a tight spot. Default on a loan and they will call and call and call to get their money.
2. Potential borrowers should look up their state’s laws on payday lending to know their rights and limitations. The National Conference of State Legislatures has a reference table available. Another good site to review is PayDay Loan Consumer Info’s State Information page. Even if the potential borrower still wants or needs to borrow the money, if the borrower has a better idea of which payday lender is operating in compliance with their state’s laws then the borrower will know who and what to look out for in a possible lender.
3. Payday loans are short term loans that operate on the premise that the borrower will pay back the amount on the next payday. Borrowers need to be aware if they cannot pay the amount in full by next payday, then they should look for another alternative.
4. Due to the highly unregulated nature of payday lending, payday lenders might stretch the limits of the interest to the point that they are skirting on the legal limits of usury laws and the borrower may not even know that they are paying far more in interest than is legally allowed.
5. Loan documents may include the Truth-in-Lending (disclosure of interest and APR) but may omit such basics as the disclosure of lender’s business location. This is very important since the loan documents may state that the Governing Law is the lender’s home state rather than the borrower’s. If the borrower does not know the lender’s home state, then it often leaves the borrower unsure of which governing law to refer to if there are questions. Again, keep in mind that payday lenders are not lending money as a charity to the borrower. They are lending money to make money so the less the borrower knows, the better off the payday lender is.
6. Loan documents will include mandatory arbitration in the event of dispute. Mandatory arbitration often favors lenders over borrowers.
7. Many Internet Payday Lenders ignore the state laws regarding payday lending in both the borrower’s and the lender’s home state. If an Internet Payday Lender includes a renewal option in the loan documents and the both the home state of the borrower and lender forbids any type of rollover or renewal, then the borrower should immediately pass on taking the loan. If a payday lender is ignoring state laws or tells the borrower that they do not need to comply with the state law for some undefined reason, then the borrower should avoid working with that lender.
8. Payday Lenders who operate out of country who arrange the loan with verbal agreement over phone and no written contract: Avoid these payday lenders like the plague. They are operating illegally: 1) All loans, even payday loans, require a written contract; 2) contact numbers are hit and miss; 3) they often overcharge in interest and 4) contact numbers are hit and miss. Yes, point 2 and 4 are repeats because the point bears repeating as does: THEY ARE OPERATING ILLEGALLY and AVOID THEM LIKE THE PLAGUE.
9. Payday lending is not legal in all states. New York, Georgia, North Carolina and Maryland have outlawed payday lending. This includes Internet Payday lenders.
10. Not all payday lenders are evil loan sharks who are hiding behind nefarious and murky state and federal laws in order to gouge people and drive them into payday loan hell. There are payday lenders who operate in full compliance with state laws of the borrowers, but the borrower needs to look for those payday lenders so that they can consider them when applying for a payday loan. If at all possible, borrowers should look for payday lenders who use the borrower’s home state as the Governing Law and that the payday lender is complying with said state laws.
With the economy in an uncertain state, payday lending is on the rise. The situation that is pushing people to take these loans are not the same as in years past. Borrowers who take payday loans are often doing so because they feel that they have no other alternative. However, borrowers must educate themselves on this type of loan more than any other kind due to its unregulated nature and the availability of these loans via the Internet. It is not an industry that protects the borrower so borrowers need to protect themselves and the more the borrowers know, the better it is for the borrowers.