• 20
  • October
    2011

People scraping by from paycheck to paycheck will inevitably face the unhappy reality of having an emergency come up, whether it be an injured child, a car breaking down, or a sickness that causes a family member to miss work. Especially in today's economic climate, it doesn't take much to set a family back and cause them to fall behind in their bills.

Families forced to make hard choices between essentials such as food or lights are often tempted to resort to online payday loans to tide them over until they can find a way to catch up. Here are some reasons why people may want to explore other options before turning to an online payday lender. There may be little relief once all is said and done.

Payday loans are supposed to operate as short term loans, with the full balance of the loan being paid on the borrower's next payday. But borrowers must beware. Read the fine print. Many lenders have renewal provisions in their contracts that allow them to automatically renew the loan, so instead of taking the full balance owed, they collect only a portion of it leaving the balance to explode at crushing interest rates.

Insane Interest Rates

Payday loans prey on the vulnerable, offering loans at high interest rates to cover the risk involved. The problem with these interest rates is that they make it virtually impossible to catch up. Interest rates may reach as high as 572 percent in some states, placing the borrower behind before they ever receive the money.

According to the Consumer Federation of America, Illinois has capped the interest rate for payday loans at 404 percent except in situations where the loan will exceed 120 days. Longer term loans have no interest rate cap.

Outside the Law

Although many states outlaw payday lending, many online lenders are able to get around state provisions because they are owned by Indian tribes and are exempt from state oversight under the cloak of tribal-nation sovereignty. CBS News reports that approximately 30 percent of all payday lenders are owned by Indian tribes.

Most borrowers are never able to repay these loans. Frustrated borrowers may find themselves forced to close their bank accounts to avoid having money drawn from their strapped accounts. Even with a closed bank account, they may face harassment for months.

Before taking out an online payday loan, borrowers should explore other options for a financial fresh start. The price for a payday loan ultimately isn't worth it.

Source: www.cbs.com, "How Payday Lenders Pull Off Crippling Rates," Armen Keteyian 26 September 2011