Payday loans help the poor feel better. Therefore, in developed countries, the government does not restrict lenders through regulations and introduces social programs for borrowers.
Loans for the poor
Low-income citizens are not interested in banks because of their low income or bad credit history. Therefore, they take out short-term payday loans online from non-banking institutions at an interest rate that the notorious loan sharks of the past never dreamed of. We are talking, in particular, of developed countries such as the United States, 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 from a day to a month, a small volume and high interest rates, from 1.5 to 2% per day. For example, in the UK they received the official name of high-value short-term loans HCSTC, in Australia – loan agreements with small amounts of SACC. The recipients of these loans often underestimate their costs and overestimate their own financial capacities. With the onset of repayment day, they are forced to roll over the payday loan, especially the one from MoneyZap.com, or take a new one. Thus, they fall into a vicious cycle of debt addiction.
How to quench the greed of lenders?
Regulators in some countries realized it was time to protect negligent borrowers online:
- Australia: Parliament legislation banning loan agreements 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 agreements had been made with those who could not afford it. After that, ASIC banned charging fees for payday loan repayment;
- United Kingdom: the Financial Conduct Authority (FCA) initiated in 2014 restrictions on the cost of short-term loans (the loan fee cannot exceed 100% of its amount);
- United States: The Consumer Financial Protection Bureau (CFPB) proposed new rules for online payday loan providers in 2016, although in February 2019 there was a move to reverse them. The bureau required lenders to verify borrowers’ incomes and ensure they had enough both to repay the loan and to live on. They also banned giving payday loans to those who already have several outstanding debts. These measures have chilled short-term lending in the countries that have introduced them and prompted lenders offering online payday loans to turn to less regulated markets.
Why Trust Online Payday Loans?
However, despite the restrictions and an active information campaign, online payday loans remain very popular. Commenting on HCSTC market trends, the UK FCA noted that more than 5.4 million loans were issued from August 2017 to July 2018. At the same time, borrowers had to pay an average of 1.65 times more than they did receive. Therefore, the regulator has decided to maintain 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 pay off the debt?
It’s definitely not worth doing. Although debt growth is limited by law, the consequences of non-payment will still be there. Here’s what it could be:
Microloan information is transferred to the credit bureau. If you don’t return the money on time, it will be reflected in this one. Thus, you will not be able to get loans from banks at a low interest rate. At least 10 years after debt repayment until data is archived.
Meet the ushers
An MFI may attempt to collect debts through the courts. If the decision is made in his favour, then the bailiffs will close the accounts, describe and sell the property. In addition, you will not be able to travel abroad.
Communication with collectors
Microfinance organizations actively use the services of collectors to such an extent that debtors of online personal loans have been protected from intrusive calls and visits by a special law.
Collectors are allowed to:
- communicate with the debtor with his consent;
- recall 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 debtors and their relatives.
When are online loans repaid?
Can a payday loan be profitable if the real interest rate is high? It can, but under certain conditions. First of all, as a new customer, you can choose between interest-free loans. Second, it’s better to partner with a company that has both attractive and permanent loyalty programs: it rewards interest-free loans, rebates, or ranks among the cheapest lenders.
The most profitable are interest-free payday loans when the client bears no expense. 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 fees. Before taking out a payday loan online, make sure it’s secure.
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 whose cost fluctuates within maximum limits. It is worth using comparison sites that make it easier to make the right decision. A personal loan will not be profitable if it is used to repay a previous loan. The best solution would be to seek savings, additional work or credit consolidation. Instant payday loans can be cheaper than bank loans offered. However, it should always be remembered that this is still a short-term loan.
In general, the idea of online payday loans is not so bad. It is the solution for those who urgently need money and are ready to return it quickly. For example, you need expensive drugs but your salary is only after two days. You take payday loans online and pay them back 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. The problems start when microloans are misused. Common situations are:
- A person has nothing to pay for a home loan and takes out a microloan to take this money to the bank. As a result, a borrower will then have to pay both the mortgage and the microloan. The chances of a borrower having the funds for both contributions are greatly reduced. A person will not have enough money for two payments next month. A person will choose 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. You take out a loan from a microfinance organization regardless of the actual cost of the loan.
As a result, microcredit debt increases 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.
History of Frank Glemstone. Frank is a graduate of the master’s program in economics. He has written numerous articles on personal finance and wealth. Working as a lead writer for MoneyZap, he now connects with clients across the country, helping them achieve their financial and personal goals.