Payday loans make poor people feel better. Therefore, in developed countries, the government does not restrict lenders by regulation and introduces social programs for borrowers.
Loans for poor people
Low-income citizens are not interested in banks because of low income or bad credit history. Therefore, they take short payday loans online from non-banking institutions at the interest that the notorious moneylenders of the past never dreamed of. We are talking, in particular, about developed countries such as the USA, Great Britain, Australia, Canada, where interest rates on loans from large banks have been very low over the past decade.
A feature of “payday loans” is a short term that is from one day to a month, small volume, and high-interest rates, from 1.5-2% per day. For example, in the UK they received the official name high-value short-term loans HCSTC, in Australia – loan contracts with small amounts of SACCs. Recipients of such loans often underestimate their costs and overestimate their own financial capabilities. With the onset of the day of repayment, they are forced to roll over the payday loan, especially the one at MoneyZap.com, or take a new one. Thus, they fall into a vicious circle of debt dependence.
How to quench the greed of lenders?
Regulators in some countries have realized it is time to protect negligent payday loan borrowers online:
- Australia: Parliament legislation to ban loan contracts for up to 15 days in 2012. In 2015, the Australian Securities and Investments Commission (ASIC), after reviewing documents from 13 lenders, concluded that loan contracts were concluded with those who could not afford them. After that, ASIC banned charging fees for repayment of payday loans;
- UK: Financial Conduct Authority (FCA) in 2014 initiated restrictions on the cost of short-term loans (the loan fee cannot exceed 100% of its amount);
- USA: The Consumer Financial Protection Bureau (CFPB) proposed new rules for online payday loan providers in 2016 although in February 2019 there was an initiative to cancel them. The bureau obliged lenders to check the income of borrowers and make sure that they have enough both to repay the loan and to live. They also forbade issuing payday loans to those who already have several outstanding debts. Such measures have cooled short-term lending in the countries that introduced it and prompted lenders offering payday loans online to look into less regulated markets.
Why should you trust online payday loans?
However, despite the restrictions and an active information campaign, payday loans online remain quite popular. Commenting on the HCSTC market trends, the British FCA noted that over 5.4 million loans were issued from August 2017 to July 2018. At the same time, borrowers had to pay on average 1.65 times more than they received. Therefore, the regulator decided to keep the price cap until at least 2020. The terms and conditions of online payday loans emphasize the reliability and confidentiality of borrowers who deal with verified MFIs.
Should I rush to repay for the debt?
This is definitely not worth doing. Although the growth of debt is limited by law, the consequences of non-payment will still be there. Here’s what it can be fraught with:
Bad credit history
Information about microloans is transferred to the credit bureau. If you do not return the money on time, this will be reflected in it. Thus, you won’t be able to get loans in banks at a low-interest rate. At least 10 years after the debt is repaid until the data is archived.
Meet the bailiffs
An MFI may try to collect debts through the courts. If the decision is made in her favor, then the bailiffs will arrest the accounts, describe and sell the property. Moreover, you will not be able to travel abroad.
Communication with collectors
Microfinance organizations actively use the services of collectors so much so that debtors on online payday loans were protected from intrusive calls and visits by a special law.
Collectors are allowed to:
- communicate with the debtor with consent;
- remind of the debt and talk about the consequences of non-payment;
- call the debtor no more than once a day, twice a week, eight times a month;
- meet in person no more than once a week.
In reality, the requirements of the law are not always respected. Collectors often terrorize both debtors and their loved ones.
When do loans pay off online?
Can a payday loan pay off at all if the actual interest rate is high? It can but under certain conditions. First of all, as a new client, you can choose between interest-free loans. Second, it is better to be associated with a company that has attractive loyalty programs as permanent: it rewards interest-free loans, discounts, or ranks among the cheapest lenders.
The most profitable are interest-free payday loans when the client does not bear any expenses. But the condition for using the stock is the timely repayment of the debt. Otherwise, it is not enough to charge standard fees as well as penalties and costs. Before taking an online payday loan, make sure how safe it can be.
Payday loans: Pros and cons – why is it safe to take them online?
In the financial market, you can find cheap payday loans online and expensive loans the cost of which fluctuates within maximum limits. It is worth using comparison sites that make it easier to make the right decision. A payday loan will not be profitable if it is taken to pay off a previous loan. The best solution would be to look for savings, additional work, or loan consolidation. Instant payday loans may be cheaper than the offered bank loans. However, it is always worth remembering that this is always a short-term loan.
In general, the idea of online payday loans is not that bad. This is the way out for those who urgently need money and who are ready to quickly return it back. For example, you need expensive medicine but your salary is only after two days. You take online payday loans and return them the day after tomorrow. Overpayment is moderate even with high-interest rates.
Microcredit is just the consequences of which depend on how you use it. Problems begin when microloans are misused. Common situations are:
- A person has nothing to pay for a mortgage and takes a microloan to carry this money to the bank. As a result, a borrower will then have to pay both the mortgage and the microloan. The chances that a borrower will have the funds for both contributions are sharply reduced. A person will not have enough money for two payments next month. A person will choose whether to deposit money for the apartment so as not to lose it or take it to the MFI. Whatever decision a borrower makes, the situation is already spiraling out of control.
- A person needs a large sum but the banks refuse the request. One takes out a loan from a microfinance organization regardless of how much the loan will actually cost.
As a result, the microloan debt grows and it becomes difficult at first and then impossible. One of the main reasons for this state of affairs is the low financial literacy of the population.
Story by Frank Glemstone. Frank is a graduate of the Master’s program in Economics Sciences. He has written numerous articles about personal finances and wealth. Working as the main author for MoneyZap he is now connecting with clients across the country, helping them achieve their financial and life goals.