Payday loans are very popular nowadays. They offer people with poor credit or no credit the opportunity to get fast cash without having to wait in long lines at a traditional bank.
However, many people who take out these types of loans are unpleasantly surprised when they receive notice from their bank that they have been declared “under-collateralized” and will be subjected to an immediate repayment obligation.
The History of Payday Loans
Payday loans are not a new invention. In fact, they’ve been around for nearly a century. However, in recent years they’ve enjoyed something of a renaissance.
There are many reasons for this, and the most obvious is the invention of the Internet. When people want money, they don’t just go to their banker anymore. These days, if someone needs money, they can just go to a reputable website and apply for a loan there.
The same is true for pay day loans. People with bad credit or no credit can now get fast cash by going to a website (usually owned by a licensed lender) and applying for a loan. This has caused an explosion in the number of these types of lenders. There are now more than a thousand online payday loan lenders in the United States.
Many of these are small, local companies that are very willing to help people with bad credit or no credit. However, not all online lenders are created equal. A few of them are honest, reputable companies that will make loans to people with bad credit or no credit. But, unfortunately, there are many online lenders who are not honest and do not use proper underwriting techniques.
How Online Payday Loans Work
The way these types of loans work is very simple. Someone who needs money goes to a website and applies for a loan. Once they do that, they are directed to an online form that requires them to enter a few details about themselves and their financial situation.
This information is then entered into a computer and used to come up with a “score” which indicates the chances they will be able to repay the loan. If the score is high enough (meaning they have a good chance of being approved), the person is informed they have been approved for the loan. Then, they are taken to another page where they are presented with various repayment options.
The amount of time it takes to get this far varies depending on the lender. But, usually, it only takes a few minutes. After they’ve selected a repayment option, they are immediately sent an email containing a link.
When they click on that link, they go to a website where they are presented with some type of application. This is the same type of application they would have filled out if they were going to a traditional bank to get a loan. The only difference is, they don’t need to worry about their credit rating because they didn’t submit any type of credit application to a traditional lender. Instead, all they did was apply for a loan from an online lender.
If they can prove they have regular income, they should have no problem getting a loan from any of these companies. And, since they are not submitting any type of credit application to a bank or other lending institution, they will not be subjected to any credit checks.
Pros and Cons of Payday Loans
There are many who argue these types of loans are great for the people who use them. They say these loans give cash-strapped people a way to get the money they need without having to deal with the hassles of a traditional lending process. Others say these types of loans are a horrible idea.
They say these companies prey on people with bad credit or no credit and charge exorbitant interest rates that are impossible for many of them to afford. However, there is one group that doesn’t fall into either category. These are people who want to use these types of loans but have been put off by the fact these companies don’t use underwriting techniques. They say it’s fine if a loan is going to go to someone with good credit or no credit at all.
But, they say, don’t make the mistake of giving a loan to someone with bad credit when there are other options available. One option is a credit union. A credit union is a not-for-profit financial institution that is regulated by federal law. This means a credit union can make loans to its members without having to worry about complying with state usury laws. In most states, the amount a person can borrow from a credit union is very limited.
But, in some states, like Texas, it’s almost unlimited. Also, most credit unions have a maximum interest rate of around 10%. By comparison, the interest rates charged by online lenders can easily exceed 300%. Another option is an installment loan. An installment loan allows you to pay for your purchases over a period of time, rather than all at once.
Payday Loans are Legal in Most States
However, they are not legal in all states. Many states have passed laws specifically designed to prevent these types of companies from operating within their borders. This doesn’t mean you cannot get a payday loan if you live in one of those states. What it means is these companies cannot offer loans to residents of that state.
But, there are other companies who operate in those states and they are free to make loans to anyone living there. For example, in Texas where online lenders are not allowed to make loans to residents, there are other companies (known as “non-resident lenders”) who are free to do business there.
These non-resident lenders can charge whatever interest rate they want and, in many cases, they can even charge a fee for simply talking with a potential borrower. This can add up to a very high interest rate indeed.
What do you think about payday loans? Let us know in the comments below!