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Payday Loans Pitfalls
| As many as 37 state legislations in the US have attributed legal status to payday loans. In one state, issuance of this type of loan is permitted only to licensed lenders. In others, there is no such regulation or law that authorizes this loan. |
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In spite of this, payday loans are considered by many as predatory loans primarily due to the disadvantages associated with them. This issue has gotten even worse due to ways followed by lenders so that they end up reaping the benefits while the borrowers suffer tremendous loss and stress.
- The most important disadvantage is the cost effectiveness of this loan. These loans are really expensive in comparison to other loans including cash advances offered by credit card companies. A payday loan is at least ten times more expensive than a small loan taken from a traditional bank.
- If the check issued by the borrower bounces, both the bank as well as the lender have the legal right to prosecute the borrower. Banks usually charge a bounced check fees and a lender can approach the court for the damage caused. Apart from these, bounced or returned checks have a negative effect on the credit ratings. Customers even face the risk of losing the bank account.
- In a predatory lending practice, the borrower gets entangled into a never ending cycle of debt. This occurs when the borrower is unable to pay back the loan. In order to pay the previous loan, the lender offers an option of renewal. In this way, the borrower continues to pay the interest charges but the actual amount never gets cleared.
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