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Notorious Practices of Payday Loan Companies E-mail

Notorious Practices of Payday Loan Companies

The need for emergency cash can materialize out of nowhere and the reflex of some people is to take a payday loan.  But the payday loan is not the best answer.  Obtaining a payday loan is similar to setting up a deal with a loan shark. And loan sharks, to say the least, have undesirable reputations. But why are payday loan companies considered similar to loan sharks? This is because payday loan companies do not adhere to the ethical standards established by the truth-in-lending laws.  

The truth-in-lending laws of the country expressly specified that loan companies must reveal to their potential borrowers the interest rate of the loan in the form of APR. The APR or the Annual Percentage Rate is the interest rate for the loan in one year. The APRs of bank loans range from 5% to 10%, depending on the term of the loan or the number of years that the loan is planned to be paid off.

The APRs of credit cards range from 14% to 21% depending on the policies of the credit card companies. That is, some credit card companies charge a higher APR for cash advances and lower APR for purchases.  There are also credit card companies that offer 0% APR, but this is for a limited time only, such as three to six months. After six months, the APR jumps up to around 19%.

What is the APR of payday loans? No payday loan company advertises the interest rates of the loan in terms of APR. Instead, the payday loan ads state the interest rate in terms of actual interest, such as $15 for every $100. This often misleads the borrower to assume that the interest is just 15%. But this is not the whole truth of the payday loan contract.

In the payday loan contract, there is a provision for cases when the borrower cannot pay the principal amount loaned. This provision is an extension of the loan. To continue extending the loan, the borrower must pay the interest, which in this example, is $15 for every $100 borrowed. If the whole scheme is simplified, the stated interest is only the interest for 15 days.  For a simple two-week interest rate of 15%, the APR becomes 360%.  

However, some payday loan companies place interest on interest. That is, if the $115 is not paid on the due date, the whole amount earns an additional interest and the amount to be paid on the next due date becomes $132.25. The APR can balloon up to a shocking 6,205%. Upon realizing that the APR can be this high, a potential customer will never consider getting a payday loan.

Unfortunately, the notoriety of payday loan companies does not stop with the way they manipulate interest rates. For payday loan companies that operate over the internet, they obtain information that could lead to identity theft, such as social security number, date of birth, license plate number, mother’s maiden name, and, astonishingly, the PIN of the bank’s ATM. The PIN or personal identification number should never be revealed to anyone. And the rest of the information must be given to reputable companies only, such as hospitals, banks, and government agencies.

Payday loan companies cannot be trusted, both with financial information and with the loan contract. This is the only reason that one needs in order to stay away from payday loans.


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